In a currency option hedge, the firm covers its downside risk but, because the contract is an option, can also benefit from any upside.

Question

Quizplus · Accepted Answer

This is correct. In a currency option hedge, the firm has the right but not the obligation to exchange currencies at a predetermined exchange rate. This allows them to limit their potential losses but also potentially benefit from any favorable currency fluctuations.

In a Currency Option Hedge, the Firm Covers Its Downside