An importer who is expecting to pay for a purchase in three months' time buys a foreign- currency call option today.Which of the following is correct?
A)Benefit from exercising the option if the foreign currency falls below the option exchange rate.
B)Benefit from exercising the option if the foreign currency rises above the option exchange rate.
C)Be protected from adverse exchange rate risk but be able to benefit financially from favourable exchange rate movements.
D)Both A and C
E)Both B and C

Question

Quizplus · Accepted Answer

By buying a foreign-currency call option, the importer has the right but not the obligation to purchase the foreign currency at the option exchange rate in three months' time. If the exchange rate rises above the option exchange rate, the importer can exercise the option and purchase the currency at a lower rate, thus benefiting financially. At the same time, the importer is protected from adverse exchange rate movements as they can still purchase the currency at the option exchange rate. Therefore, both options B and C are correct.

An Importer Who Is Expecting to Pay for a Purchase