Hello Sayed,
As explained (By Wiley I think), the firm is trying to avoid any fluctuations in Peso currency in order to
pay its AP exactly the same amount without having a Loss from currency evaluation.
Call options are financial contracts that give the option buyer the
right to buy a stock, bond, commodity or other asset or instrument (Peso currency) at a
specified price within a specific time period.
Put options work in opposite direction, similar to forward selling contracts Peso when the firm wants to hedge its accounts receivable accounts (Customers).
If the firm has AP balance of $1,000 equal to Mexican Peso MXN 20,110 at 31 Dec 2019, so it will buy a call option to buy the Peso at $1 = MXN 20.11 exchange rate on March 2020 (Say 90 days credit) to pay its AP,
regardless of how much is the spot price of Peso at that date.
Kind regards
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Samer Ahmad, FMVA, SCA
Kuwait
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Original Message:
Sent: 03-07-2020 08:39 AM
From: Syed Yousuf Jamal
Subject: Option-please help I didn't understand the question
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Syed Yousuf Jamal
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