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When a U.S.-based company has an accounts receivable of €100,000 due in three months,the company can...

When a U.S.-based company has an accounts receivable of €100,000 due in three months,the company can hedge this euro receivable by:

a. buying a three-month put option on €100,000.

b. buying a three-month call option on €100,000.

c. buying €100,000 forward at a three-month $-€forward rate.

d. borrowing U.S. dollars for three months, selling the dollars for euros spot, and then investing the euros for three months.

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Answer #1

US Company has receivable of Euro 100,000 in 3 months.

The company would want to convert Euro into Dollars.

Call option is the right to buy the underlying asset while put option is the right to sell the underlying asset

Hence, the correct answer is

a. buying a three-month put option on €100,000.

Since put option is the right to sell

Call option will give option to buy Euro, hence not suitable

Forward contract for BUYING Euro is also not suitable

d represents money market hedge for payables in Euro which is again not useful

hence, the answer is a.

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