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Answer: To hedge foreign exchange risk, a long binary option on the currency provides insurance that is identical to a short foreign exchange futures contract
The false statement is **C**. A **short foreign exchange futures contract** hedges exchange-rate risk by locking in a future exchange rate. A **binary option** does not provide identical protection; it pays a fixed amount only if a condition is met, so its payoff structure is fundamentally different. The other statements are true: - Writing options generally requires margin. - An American option is never worth less than an otherwise equivalent European option. - Employee stock option exercise can dilute equity, while exchange-traded option exercise typically does not.
Author: Manit Arora
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Q-607.3. In regard to option mechanics, each of the following is true EXCEPT which is not?
A
A margin account is required when clients write (i.e., sell) options but not when the buy options
B
An American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.
C
To hedge foreign exchange risk, a long binary option on the currency provides insurance that is identical to a short foreign exchange futures contract
D
While the exercise of an exchange-traded option typically does not cause dilution of the underlying company's equity, exercise of an employee stock option (ESO) typically does cause dilution
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