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A U.S. firm buys merchandise from France. To hedge the transaction risk the U.S. firm should:...

A U.S. firm buys merchandise from France. To hedge the transaction risk the U.S. firm should:

A. buy euro call option

B. sell euro call option

C. buy euro put option

D. sell euro put option

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Answer #1

A) Buy euro call option

Since the firm has to pay euros, its risk of exchange rate fluctuations can be crystalized when the call option is bought.

The call option can be exercised at a predetermined strike price when the option is exercised when the market price increases.

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