another simple (dummy) question on FX hedging

cfalevel2011

Jill Pope, CFA, is a portfolio manager in the United States that will begin managing a portfolio denominated only in Euros. Her supervisor asks her to hedge the portfolio against currency fluctuations using an instrument that will effectively be an insurance policy against downside risk while offering upside potential. To do this, Pope:

A) take a long position in $/€ forward contracts.
B) should buy put options on the $/€ exchange rate.
C) should sell put options on the $/€ exchange rate.

The answer is B... does this sign $/€ make a difference?
e.g.could the choices be changed to:
A) should buy put options on the $/€ exchange rate.
B) should buy put options on the €/$ exchange rate.

bkballa

Lvl II stuff :

the "/" sign means left currency per right currency i.e. $/Euro means Dollars per Euro
the ":" sign means right currency per left currency i.e. $:Euro means Euro per dollar

nannan66

I know this ccy pair is normally as €/$, so is it valid to have $/€ and €/$ for forward/future contract?

What's the convention?

thx

bboo

i prefer the $/Euro convention $ per euro

but i heard the market convention is $:eur eur per dollar


by the way by elimation the answer is clearly B....................


answer A is somewhat right BUT you would be locked into a rate and lose out on any upside potential

pennyless

Hi

saw this in Qbank Q:
Being long the currency means holding or expecting to receive a foreign currency, therefore to hedge this foreign currency exposure you must sell forward contracts (deliver foreign currency and receive domestic currency at the expiration of the contract).


Is it true 'fward contract' means deliver foreign currency and receive domestic currency????