Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:
A) buy a pound put option.
B) sell a pound put option.
C) buy a pound call option.
D) sell a pound call option.

Question

Quizplus · Accepted Answer

To protect against unexpected changes in the dollar/pound exchange rate, the best choice would be to buy a pound call option. This would give the firm the right, but not the obligation, to purchase pounds at a fixed exchange rate if the exchange rate were to become unfavorable. Selling a put option would obligate the firm to purchase pounds at a fixed exchange rate if the exchange rate were to become unfavorable, which would not be desirable. Buying a put option or selling a call option would not provide adequate protection for the accounts payable denominated in pounds.

Your US Firm Has an Accounts Payable Denominated in UK Pounds