Hedging foreign currency earnings with basket options
REAL-LIFE PROBLEMS, INNOVATIVE SOLUTIONS
BACKGROUND
Bank of America's FX strategy group projects broad weakening of the USD against major currencies during 2006. Given this forecast, companies with earnings in major currencies may be tempted to leave such earnings un-hedged. Prudence, however, argues for managing against a 'weak-USD' view more cautiously – that is, by hedging foreign earnings with foreign currency put/USD call options. By hedging with options, companies will position themselves to benefit from USD weakness if our view
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