Question

Your firm has accounts payable (A/P) of EUR7,000,000 and the credit terms are net 90 days.   The euros will be purchased when the payment is due. The spot exchange rate for the euro is $1.1014/EUR. Which of the following options would you use to hedge the firm's risk? (Note: All options are American style.)

	A.	2-month call option with a strike price of $1.1050 and a premium of $0.0128 per euro.
	B.	2-month put option with a strike price of $1.1000 and a premium of $0.0140 per euro.
	C.	3-month put option with a strike price of $1.1050 and a premium of $0.0206 per euro.
	D.	3-month call option with a strike price of $1.1100 and a premium of $0.0206 per euro.

Answer 1

Option D 3-Month Call Option with a strike price of $ 1.1100 And a Premium of $ 0.0206 Per Euro.

Because compnay has liablity to pay the EURO of 7,000,000 in next 90 days which is approximateley 3 month form the current day if company has to buy call option because he want to pay the Euro so he has to purchase for purchase call option so the option of put not available Option B and C ruled out and the option A is only for 2 month where as payament is after 3 month so to be better hedge the OPtion D is usefull and better for the use to hedge firem Risk.