Which of the following is a valid explanation for entering into these option positions?

A UK manufacturing company has simultaneously:

• purchased a put option to sell USD 1million at an exercise price of GBP1.00 = USD1.65

• sold a call option that grants the option holder the right to buy USD 1million at a price of GBP1.00 = USD1.61 (this option has the same maturity date as the put).

Which of the following is a valid explanation for entering into these option positions?
A . The company expects to receive USD 1million from a customer and wishes to offset the cost of the put option by the premium on the call option.
B . The company expects to pay USD 1million to a supplier and wishes to offset the premium from the call option against the cost of the put option.
C . The company expects to receive USD 1million from a customer and wishes to obtain an additional benefit if the USD strengthens beyond GBP 1.00 = USD 1.61.
D . The company expects to pay USD 1million to a supplier and wishes to obtain additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.

View Answer

Answer: A