Question

a french company that exports machinery is expecting to receive $30 million in 6 months. the firm converts all its foreign currency receipts into euros. the cfo of the company wishes to lock in a minimum fixed rate for converting the $30 million to euro but also wants to keep the flexibility to use the future spot if it is favorable. what hedging transaction is most likely to achieve this objective?

Answer 1

Traders purchase a put option to increase their profit from a stock's decline. Hence Buying a put option is likely to achieve this objective.

What is Buying a put option ?

A trader can profit from stock prices below the strike price for a small upfront cost until the option expires. When you purchase a put option, you usually expect the stock price to fall before the option expires.

Purchasing a put option on the dollar guarantees a minimum exchange rate but does not require exercise if the exchange rate moves in a favorable direction.

Forward and futures contracts would lock in a fixed rate but would not allow for profit if the value of the dollar in the spot market three months later turned out to be greater than the value in the forward or futures contract.

Learn more about Buying a put option here

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