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Sfm-ca final

govinda (student) (90 Points)

16 March 2017

Hello Everyone, please suggest me if I need to make payment in Japense Yen then should I go for "PUT OPTION" or "CALL OPTION" incase of Foreign Currency Option contract. I could not understand the solution of November-2015 CA Final question-SFM Q1(d)

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CA. Sandeep Kumawat (CA) (341 Points)
Replied 17 March 2017

There are two case
1. FWD cover where the Indirect quote is given (that is why to buy JPY, Rupee bid rate is used because it is an indirect quote.

2. In case of Option cover, JPY option is not available whereas Rupee option is available for trade, in this case, you can sell Rupee to get JPY (same as above but at strike rate), however, to buy JPY you will have to buy a JPY CALL option, since JPY call option is not available we can buy INR PUT option (uncovered hedging cannot be done in option by selling an option).

You should first look at the quote available and then the strategy to hedge/cover.

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govinda (student) (90 Points)
Replied 17 March 2017

But in the solution part PUT OPTION has been done. Why is so?

CA. Sandeep Kumawat (CA) (341 Points)
Replied 17 March 2017

Read it again...

You want to buy JPY after 3 months

what will you do - either Buy JPY or Sell INR

In the question, INR quote is available that why we are selling Rupee after 3 months at the strike price.

if JPY option was available, we were buying a Call option

since JPY option is not available (i.e. Rupee option is available) we are selling Rupee (selling Rupee does not mean we will short INR call) that is why we are buying INR Put option

you must be knowing that we cannot hedge by selling option, in the case of option we have to buy only (that is why INR Call is not sold (if we sell INR Call we will be exposed to the unlimited risk)), rather PUT is purchased.