Under an option hedge, the domestic currency value of payables and receivables is not known in advance because:
A) the price of an option depends on the volatility of the underlying exchange rate
B) the outcome depends on the vega of the option
C) the outcome depends on the delta of the option
D) the outcome depends on whether or not the option is exercised

Question

Quizplus · Accepted Answer

The domestic currency value of payables and receivables under an option hedge is uncertain because it depends on whether the option is exercised, which in turn depends on the movements of the exchange rate relative to the strike price of the option. If the option is in the money, it may be exercised, affecting the value of transactions. If it's out of the money, it may not be exercised, leading to a different financial outcome.

Under an Option Hedge, the Domestic Currency Value of Payables