Question

Discussion Board Post

How to hedge payables with currency call options?

Answer 1

currency call options gives the right to the holder of the option to buy a specific currency at a specific price in the future. the holder of the option will lock in a specified price in which he will exchange his currency for the currency of the country exporting the goods.

if the spot rate in the future is more than the strike price in which the option holder agreed to buy the currency in the future,then he may exercise the option. if the strike price is more than the spot rate then the holder of the call option will not exercise the option and will only lose the premium that he had paid to purchase the option.

now, for example if the if a person in India purcahses goods from the U.S.A he has to pay in U.S dollars upon delivery of his goods from America. to hedge himself against the foreign currency movements since he has to buy dollars to pay to the exporter he may buy a call option where he agrees upon a price in whcih he will buy the dollars. he will have to pay premium to purchase the call option. In the case he does not exercise his option , he will be losing the amount of premium.