Question

A local producer, exports carpets to US. The counter party sends a notice of payment of $100,000 in 1 month. Which of the following can be used by the exporter to protect against unfavorable movements in the $/TL parity?

A)short forward

B)short call

C)long put

D)long call

Answer 1

A local producer, exports carpets to US. The counter party sends a notice of payment of $100,000 in 1 month. Which of the following can be used by the exporter to protect against unfavorable movements in the $/TL parity?

Answer: D. Long Call

As the payment will be made in $US, and the money will be converted in the local currency, it will be favorable to the local producer if the US $ becomes strong and the local currency becomes weak. But if the reverse happens then to protect his capital, he will Long call.

If the $ becomes strong, he will gain in Call, payment loss will be covered

if thee $ becomes weak, he will gain in the payment he will receive and the long call loss well be covered