Question

1. Assume you are an US exporter with an account receivable denominated in Singapore dollars to be paid in one year. You are considering hedging currency risk using the options market. What type of option and position would you need to use?

a) Sell a call option

b) Sell a put option

c) Buy a put option

d) Buy a call option

Answer 1

An exporter wants the foreign currency to appreciate and invertly the domestic currency to depriciate. An exporter will make losses if the foreign currency is depriciated because in that case, the exporter will get less domestic currency.

Therefore, if the exporter will lose money from depriciation of foreign currency then he should buy Put Option in Foreign currency, as Put option gives profits when the currency Depriciates. So, it will compensate the loss from the depriciation of foreign currency.

So, Option C is correct.