The purchase of a currency put option would be appropriate for which of the following?
A) Investors who expect to buy a foreign bond in one month.
B) Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C) Corporations who expect to collect on a foreign account receivable in one month.
D) all of the above

Question

Quizplus · Accepted Answer

A currency put option provides the buyer with the right, but not the obligation, to sell a specific amount of a currency at a predetermined exchange rate on or before a specific expiration date. This would be appropriate for corporations who expect to buy foreign currency to finance foreign subsidiaries as it can help mitigate the risk of unfavorable currency movements. Option A is incorrect as investors who expect to buy a foreign bond in one month would typically purchase a currency call option to hedge against potential currency appreciation. Option C is also incorrect as a currency call option would be more appropriate for corporations who expect to collect on a foreign account receivable in one month as it would protect against potential currency depreciation.

The Purchase of a Currency Put Option Would Be Appropriate