Question

Tyson Inc. has an account payable in Swedish krona due in 60 days. Which would be...

Tyson Inc. has an account payable in Swedish krona due in 60 days. Which would be an appropriate hedge?

Question 9 options:

Buy a call option on the Swedish krona, expiring in 60 days

Enter into a forward contract to sell Swedish krona in two months

Borrow Swedish krona for 60 days for the purpose of a money market hedge

Buy a put option on the Swedish krona, expiring in 60 days
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Homework Answers

Answer #1

The answer is buying a call option on the swedish krona, expiring in 60 days.

Explanation :-

The Tyson Inc. Has an account payable in swedish krona in 60 days, which means co. will be afraid of swedish krona rising. So, appropriate hedge in given options will be buying call on krona because in case if krona will rise the co. will get difference in strike and spot price.

Selling swedish krona forward will not help because co. has exposure of swedish payment ,not of its receipt. Also if co.thinks of entering into money market cover, the co. Needs to borrow its home currency npt the swedish krona., instead there will be investment in swedish krona.

Also, a put on swedish is for down side betting i.e. one should buy put if he/she is afraid of swedish krona falling which is not here in our case.

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