Options Strategy for Importers

Options Strategy for Importers

Illustration :

An Importer, importing raw materials from a foreign country is supposed to make payments in dollar. In this situation the importers is exposed to appreciation in USD/INR. The importer can thus buy USD CALL option to cover his transactions 1st October 2010 at a strike rate of 45.50. The expiry is 2 months, i.e. 30th of December 2010. The premium for the above mentioned Call Option is 0.30 paise, so at the time of making actual payment if the spot price has moved below the Strike Price, Dollar becomes cheaper and the loss on Call Option is maximum upto 0.30 paise. If at the time of making actual payment the spot price has moved above strike price, the Dollar becomes costlier but the loss is compensated by an appreciation in the premium price. Following is the Pay Off Table depicting gain and loss at various levels of exchange rate :

SPOT RATEEXERCISE RATEPREMIUM PAID GAIN/LOSS
CALL@45.50
44.00 0.30-0.30
44.50 0.30-0.30
45.00 0.30-0.30
45.50 0.30-0.30
46.000.500.300.20
46.501.000.300.70
47.001.500.301.20