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Currency risk management

8.4 Options hedging calculations

1. Now – set up the hedge

 Call or put options? Look at the currency of the contract

 Which expiry date? First contract to expire after future transaction

 Which strike price? Many different ways of choosing – RTQ

 How many contracts? Look at contract size. May need to round. May
need to convert currencies to match transaction

2. Contact the exchange and pay the premium.

3. Closing out: Future transaction date – compare the option price with the

prevailing spot rate and make decision – to exercise or allow to lapse?

4. Calculate CFs. The options may not match exactly with the future

transaction so extra exchanges may be necessary.

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