Question

A US firm will be paying Indian rupee in the future for imports, Which of the following is the best strategy if the US firm wants to completely avoid exchange rate risk? (Assume the firm has no offsetting position in rupees).

	a.	Sell a call option on rupees.
	b.	Buy a put option on rupees.
	c.	Sell a futures contract on rupees.
	d.	Long position in a rupees futures contract.

Answer 1

If a US firms need to pay in rupees in the future for imports then they need to have rupees while making the payment.

Let's see each option and what it will lead us to-

a) Selling a call option on rupees means that we are under an obligation to sell the rupees if in case the buyer exercises the call option. So, in this case we won't have the rupees on expiry date to make the payment for imports.

This is not the correct answer.

b) Buying a put Option gives us a right to sell the rupees at a strike price. In this case too we won't be having rupees in hand for the payment if in case we exercise the right at the time for payment for imports

This is not the answer.

c) Selling a futures contract means that again we will have to deliver the rupees to the long party at a future date and we won't be left with any rupees to pay for the imports

This is not the answer.

d) Long position in the futures contract will lead us to a position which will help us fixing the price of the rupees today and at expiry we will have the dollars to make the payment.

This is the correct answer.

Hence, Option D is the answer