You figure out how offsetting option premiums can be achieved, and now you turn your attention to how to use them at Agri-Drone. Your objective is the same: protect the Company against its foreign currency risks on major sales to foreign customers. However, with the increased volume of activity, you seek to explore ways to eliminate something less than 100 percent of the risk and you broach that idea to Stephanie Majors, the CEO. She encourages you to continue your research. And so, as is your nature, you start playing with some numbers.

Assume the following facts:

Current EUR/USD spot rate -

1.30

6 mo. forward contract pricing

-0.0100

6 mo. EUR/USD Call strike 1.3000 premium $0.035

6 mo. EUR/USD Call strike 1.3200 premium $0.025

6 mo. EUR/USD Put strike 1.3000 premium$0.045

6 mo. EUR/USD Put strike 1.2800 premium$0.025

Problem 2

What pairing of options would come closest to achieving the same risk management attributes of a EUR/USD six month forward contract? Why?

 

Note: The space expands as you write