Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation?

Question

Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation?​

Quizplus · Accepted Answer

Purchasing a call option would allow the firm to benefit from any potential depreciation of the Korean won while also limiting its downside risk. If the won does depreciate, the firm can exercise the option and purchase the required amount of won at the agreed-upon strike price, which would be lower than the current market exchange rate. If the won does not depreciate or even appreciates, the firm can simply let the option expire and purchase the won at the current market rate. This way, the firm is protected from the downside risk while still able to benefit from a favorable exchange rate movement.