CMA Study Group

Option-please help I didn't understand the question

Jump to Best Answer
  • 1.  Option-please help I didn't understand the question

    Posted 21 days ago


    ------------------------------
    Syed Yousuf Jamal

    ------------------------------


  • 2.  RE: Option-please help I didn't understand the question
    Best Answer

    Posted 20 days ago
    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

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 3.  RE: Option-please help I didn't understand the question

    Posted 20 days ago
    Dear Syed

    When a firm has a foreign currency denominated payable, it will need to protect itself from an appreciating foreign currency. So ideally, the US firm will want to protect itself from a possible increase of peso w.r.t the USD. A call option would give the right but not obligation to buy pesos at a predetermined price, this removing the uncertainty of a future unfavourable price movement. Hope am clear

    thanks

    ------------------------------
    Paras Chhabra
    Director/Manager
    New Delhi
    India
    ------------------------------



  • 4.  RE: Option-please help I didn't understand the question

    Posted 20 days ago
    Thank u very much Mr Paras and Mr samer

    ------------------------------
    Syed Yousuf Jamal
    None
    Hyderabad
    India
    ------------------------------