Question

11 true or false

A japanese importer has a 1,000,000 euro payable due in one year. To hedge the position, it will buy put options on euro.

Answer 1

The answer to the above question is true.

Note:

As the price of the underlying stock decreases, put option becomes more valuable or vice-versa. When put options are exercised, it provides a short position in the underlying asset. So, they are used for hedging purposes and/or to speculate on downside price action.

As a risk-management strategy, investors often uses put options as a protective put. It is used as a form of investment insurance to ensure that losses in the underlying asset do not exceed a certain amount which is the strike price.