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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

A corporate treasurer holds a EUR 10 million receivable due in six months and wants protection against a falling euro while keeping the benefit if the euro rises. Which strategy best meets this goal?

Buying EUR put options is best. The put gives the right to sell euros at the strike, setting a floor on the dollar value of the receivable, while the company still gains if the euro rises. Forwards and futures eliminate that upside, and selling calls does not protect.

  1. ABuy EUR put options (USD call)Correct
  2. BSell EUR call options
  3. CBuy EUR futures
  4. DEnter a forward to sell EUR

Explanation

A long euro put sets a floor on the USD value of the receivable while leaving upside if the euro appreciates, at the cost of the premium. Forwards and futures lock in the rate and remove upside. Selling calls gives only premium income and no downside protection.

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