If a firm hedges a future purchase of euros by purchasing a call option,the firm ________ the potential cost but will benefit if the euro ________.

Question

Quizplus · Accepted Answer

By purchasing a call option, the firm caps the maximum cost of purchasing euros (since it can exercise the option if the euro appreciates beyond the strike price), but it can still benefit from a favorable exchange rate if the euro appreciates, as it is not obligated to exercise the option.

If a Firm Hedges a Future Purchase of Euros by Purchasing