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Hedging Foreign Exchange Risk: A Simple Example

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1. A U.S. importer who owns a Belgian company 500,000 Euros payable 30 days from today expects that U.S. dollars will weaken during this period. What would you advise the importer to do? What would happen if the U.S. dollars were to strengthening during this period?

2. A U.S. importer purchases a currency option. If the foreign currency does not rise to the strike price, what should the importer do?

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Solution Preview

1. In case the importer expects the dollar to weaken he should buy an option to get 500000 Euros on the due date for a certain price. To see why lets assume that today the Euro is trading one-for-one with the dollar. So 500000 Euro = 500000 ...

Solution Summary

Hedging foreign exchange risk between Euros and USD currency.

$2.19