Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a French firm to hedge a £100,000 receivable,
A)buy 10 call options on the pound with a strike in euro.
B)buy 10 put options on the pound with a strike in euro.
C)buy 8 call options on the euro with a strike in pounds.
D)buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a strike in pounds.

Question

Quizplus · Accepted Answer

To hedge a £100,000 receivable, the French firm should buy 10 put options on the pound with a strike in euro to protect against a potential decrease in the exchange rate. Additionally, the firm should buy 8 call options on the euro with a strike in pounds to protect against a potential increase in the exchange rate. This combination of options will provide the firm with the necessary flexibility to mitigate potential currency risks.

Suppose That the Exchange Rate Is €1