Suppose that you have a foreign currency receivable (payable). What option strategy places a floor (ceiling) on your domestic currency revenue (cost)?
What will be an ideal response?
Answer: If you have a foreign currency receivable, you eventually want to sell foreign currency. Purchasing the option that gives you the right to sell (a put option) provides a hedge that places a floor on your domestic currency revenue. If you have a foreign currency payable, you eventually want to buy foreign currency. Purchasing the option that gives you the right to buy (a call option) provides a hedge that places a ceiling on your domestic currency cost.
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