Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation:

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Quizplus · Accepted Answer

In this situation, the U.S. firm wants to hedge against the depreciation of the Korean won. The purchase of a call option gives the firm the right but not the obligation to buy Korean won at a predetermined exchange rate (strike price). If the Korean won does depreciate, the firm can exercise the option and purchase Korean won at the lower rate. If the Korean won appreciates, the firm can let the option expire and simply pay the market rate for the Korean imports. It is more appropriate to purchase a call option than to buy dollars forward or sell dollars forward, as these strategies require a specific exchange rate to be selected, which may not work in the firm's favor if the won depreciates more than expected. A put option, on the other hand, would be appropriate if the firm were paying in U.S. dollars, but it is paying for Korean imports in won. Therefore, the best choice in this situation is to purchase a call option.