Assume that you are a US manufacturer and frequently undertake export and import
ID: 2618607 • Letter: A
Question
Assume that you are a US manufacturer and frequently undertake export and import transactions with a particular country (Japan). What is the best way to hedge? Should you use futures or should you use options? Discuss. Assume that you are a US manufacturer and frequently undertake export and import transactions with a particular country (Japan). What is the best way to hedge? Should you use futures or should you use options? Discuss. Assume that you are a US manufacturer and frequently undertake export and import transactions with a particular country (Japan). What is the best way to hedge? Should you use futures or should you use options? Discuss.Explanation / Answer
If someone in export and import transctions then he is mainly exposed to currency risk.
The best way to hedge currency risk is through futures.
Below are few reasons why one should use future rather than option to hedge currency risk:
1. Future is standardized instrument and one can use the leverage while using futures.
2. There is fixed upfront trading cost is associated with futures.
3. High liquidity of future contract make it attractive alternative to hedge because sometime it is difficult to close position.
4. Pricing of future is easier to understand in repect to options.
5. There is no time decay with future unlike option which can be wasted if not hedged properly.