Options and its use ,call option and put option
An exporter who expects to execute the contract and receive foreign exchange after six months may enter into a put option for six months which entitles him to sell the foreign currency on maturity at an agreed predetermined price (strike price). If on maturity the spot price for the currency is more favorable to the exporter he may choose not to exercise his right of selling under the contract. He can instead sell in the market at the spot rate.
Similarly, an importer may enter into call option entitling him to buy the foreign currency on a future date.
Options contract is useful especially in covering exchange risk under contingent conditions like when the company enters into a bid. The exchange risk will arise only if the contract is awarded and foreign currency exposure arises. Other methods of hedging, such as forward contracts, will prove costly if the contract is not awarded and forward booked has to be cancelled.
