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    Question

    An Indian corporate expects to pay USD in 3 months and

    fears the USD will appreciate. Which hedging strategy is most suitable?
    A Buy USD call option Correct Answer Incorrect Answer
    B Sell USD call option Correct Answer Incorrect Answer
    C Buy USD put option Correct Answer Incorrect Answer
    D Enter currency swap Correct Answer Incorrect Answer
    E Enter commodity future Correct Answer Incorrect Answer

    Solution

    If USD appreciates, the firm must pay more in INR. For example, if the USD/INR is Rs. 88 per USD and it USD appreciates to Rs.90 per USD, the USD is said to appreciate and INR is said to depreciate. A USD call option gives the right to buy USD at a fixed strike (Say USD/INR of Rs.88), protecting the cost of USD payments.┬а A put option protects USD receipts, not payments.┬а Currency swaps are long-term instruments and not suitable for short-term hedges.

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