Foreign Currency Hedging for U.S. Exporters
A U.S. manufacturing company expects to receive a payment of 50,000,000 Japanese Yen in 6 months. The company is concerned that the Yen will depreciate against the U.S. Dollar. What option position provides the BEST protection?
To protect against the decline of a foreign currency received in the future, the exporter should BUY PUT options on that foreign currency (or buy call options on the U.S. Dollar).
Complete Analysis & Legal Rationale
If the Yen depreciates, the Yen Put option gains intrinsic value, offsetting the cash loss on the conversion back into U.S. Dollars.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Buying puts on the foreign currency hedges against depreciation of future receivables.
Buying calls protects an importer who needs to BUY foreign currency.
Selling puts provides only limited income and leaves full downside currency risk.
Selling dollar calls caps upside without providing downside floor.
Official Standard: Hedging foreign receivables with standardized currency options.