Question

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a U.K. firm to hedge a €100,000 receivable,

A.buy 10 call options on the euro with a strike in pounds sterling and buy 8 put options on the pound with a strike in euro.

b.sell 10 call options on the euro with a strike in pounds sterling.

c.buy 8 put options on the pound with a strike in euro.

d.buy 10 call options on the euro with a strike in pounds sterling

Answer 1

On a more secure side, the firm should accept position in call just as put to support the conversion scale hazard totally.

Size of a call choice on euro is 10,000 units in euro, in this way, the firm will require 10-call choices on the euro with strike in pounds.

Size of put choice on pound is 10,000 units in pound, and one pound is equivalent to 1.25 euro, along these lines, to support the payables of euro 100,000 the firm will require 8 put choices.

Accordingly, the firm ought to by 10 call alternative on the euro and sett 8 put choice on the pound. Along these lines, the right answer is 'first decision'.