You will receive 554000 Ukraine hryvnia (UAH) in 6 months. You want to insure the amount by an option with a strike price of €0.029. The current exchange rate (UAHEUR) equals to €0.026. The premium per contract equals €7 with the contract size being 100,000 UAH. The respective effective interest rate equals 0.99%.
1. Do you buy a put or a call option to hedge the receivables?
2. Calculate the total value of all your transactions in euro if the spot rate at maturity equals €0.018, assuming that you bought the option.
3. Calculate the total value of all your transactions in euro if the spot rate at maturity equals €0.04, assuming you bought the option.
4. Is it better to hedge your position? Select the correct answer:
a) You should hedge your position because it reduces risk.
b) You should not hedge your position because it is costly.
c) There is not enough information to make a decision.