Question
Mr. Sumant imported mobile handset parts for his mobile
assembling unit in Tamil Nadu from an exporter in China. He has to pay USD 1,00,000 to the exporter after 3 months. Mr. Sumant is interested in hedging the foreign currency exchange rate risk through options. Which of the following he should do to hedge his position?Solution
Since Mr. Sumant needs to buy dollar amount of USD1,00,000 after 3 months he may choose to buy a call option. A call option would give him the right to buy but not obligate him to buy the dollars at the exercise price mentioned in the option if it is in his favor after 3 months. Ass uch, by paying a small premium today, Mr. Sumant will be able to hedge his dollar payment to the exporter from exchange rate risk.
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