Suppose That the Exchange Rate Is €1

question 78

Multiple Choice

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.
Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.
For an Italian firm to hedge a £100,000 payable,

• A)buy 10 call options on the pound with a strike in euro.
• B)buy 8 put options on the euro with a strike in pounds.
• C)both a and b will work.
• D)simultaneously use strategies a and b
• E)none of the above

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Definitions:

Reaction Formation

A psychological defense mechanism where an individual expresses feelings or behaviors that are directly opposite to their true feelings.

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Aggressive or antagonistic attitudes or behaviors towards others, often stemming from anger, frustration, or resentment.

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