A hedger buys a call option on sterling for $0.06/£ at an exercise price of $1.80 per £. What is the worst exchange rate that can be achieved? Is that a sensible way for a hedger to consider an option?
The worst rate that can be achieved is $1.86 per £, that being equal to the $1.80 exercise price plus the premium of $0.06 . This view is perfectly sensible as ...
Answers a question on use of call option for hedging.