Question

You buy a call option to hedge your position, which is that you owe 125,000 Euro to be paid in 180 days. What is the worst thing that could happen to you (meaning what is the worst market movement against you) and, if that should happen, what is your exposure?

Answer 1

If I have Euros payable that would mean that any negative movement that would lead to appreciation in Euro would be increasing my overall payables position but since it is given that I have hedged the position using a call option, so these wild moments in appreciation of Euro Cup be hedged.

When there would not be much appreciation in the value of the Euro and cost of hedging would be total loss for me because there is no adverse movement in Euros, so when there is a stability in the currencies and there is no real wild movements which will be negatively impacting my overall underlying position then the premium paid on call option would be a waste, and hence when there is no real movement in Euro that would be a negative for me because the cost of hedging would be a complete loss and it would not be recoverable so it would have been better not to hedge in scenario when Euro is not expected to appreciate or is expected to remain in a rangebound position.