Hedging transaction exposure with option contracts allows the firm to benefit if exchange rates are favorable but protects the firm if exchange rates turn unfavorable.

Question

Quizplus · Accepted Answer

Hedging with option contracts gives the firm the ability to participate in favorable exchange rate movements while providing protection against unfavorable exchange rate movements. This is because the firm has the right but not the obligation to buy or sell at a specific exchange rate, allowing them to avoid losses if exchange rates move against them while still benefiting if rates move in their favor.

Hedging Transaction Exposure with Option Contracts Allows the Firm to Benefit