Company XYZ, a US-based firm, holds net trade receivables of EUR 5,000,000 from a German export contract, due to be received on December 1, 2019. On June 1, 2019, the spot exchange rate is USD 1.19/EUR, and the six-month forward rate is USD 1.17/EUR. To hedge this exposure, the CFO is considering two alternatives:

Forward contract: Lock in the exchange rate at USD 1.17/EUR.

Selling a call option: Write a 6-month EUR call option with a strike price of USD 1.19/EUR, receiving a premium upfront.

In assessing the potential hedging strategy, the CFO argues that selling the call option is preferable to using a forward contract. Their reasoning is:

If the EUR appreciates against the USD, XYZ can still exchange EUR at USD 1.19/EUR (the option strike).

If the EUR depreciates, the option will expire worthless, allowing XYZ to keep the premium while benefiting from a more favorable spot rate.

What can be concluded about the CFO’s analysis of these two hedging strategies?

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Last updated: February 7, 2026 at 03:43

The CFO's analysis is correct and the company is better off whichever way the EUR rate goes.

12.1%

The CFO's analysis is not correct and the company will suffer if the EUR appreciates sharply against the USD.

23.2%

The CFO's analysis is not correct and the company will suffer if the EUR moves within a narrow range.

17.2%

The CFO's analysis is not correct and the company will suffer if the EUR depreciates sharply against the USD.

47.5%

Financial Risk Manager Part 1