Currency options are used by a wide range of

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Unformatted text preview: and several other important currencies. Currency options are used by a wide range of traders—from the largest multinational companies to small exporters and importers, as well as by individual investors and speculators. Unlike futures and forward contracts, options offer the key benefit of hedging, which involves offsetting or protecting against the risk of adverse price movements, while simultaneously preserving the possibility of profiting from favorable price movements. The key drawback to using options to hedge foreign-currency exposures is its high cost relative to using more traditional futures or forward contracts. 698 PART 6 Special Topics in Managerial Finance EXAMPLE Assume that a U.S. exporter just booked a sale denominated in Swiss francs with payment due upon delivery in 3 months. The company could hedge the risk of depreciation in the dollar by purchasing a Swiss franc put option. This would give the company the right to sell Swiss francs at a fixed price (say, $0.60/Sf). This option would become valuable if the Swiss fr...
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