Suppose that an US airlinereceives a considerable portion of its revenues in euros, and isconcerned about exchange rate risk. Two hedging choices the firm isconsidering are (i) futures contracts on the euro and (ii) call orput options on the euro.
Explain whether this firmshould buy or sell futures contracts on the euro. Alternatively,the firm could hedge using options. In that case, should the firmuse call or put options and should the firm buy or sell theseoptions?
Discuss the advantages and disadvantages of hedgingusing options as compared to futures contracts.
