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Company treasurer option strategies developed due future foreign currency transactions occur contract Italian high-tech firm finalized. The treasurer construct a memo hedging strategies including a bull spread, a butterfly spread, and a ratio spread.
Memo: Options spreads "The ratio spread is a neutral strategy in options trading that involves buying a number of options and selling more options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy" (Ratio spread, 2013, The Options Guide). This allows for multiple contingency plans and allows for our company to be extremely flexible in the current environment.
The treasurer
Regarding the recently-negotiated contract with Company X, one of the most important issues to consider is how to mitigate our risk as a company. Given that Company X is based in Italy, the economic instability of the European Community (particularly its Southern European countries) and the Euro is of paramount concern. A bull spread would likely be unsuitable given that it is "used by option traders who believe that the price of the underlying security will remain stable in the near-term but will eventually rise in the long-term" (Bull spread, 2013, The Options Guide). Neither of these are likely scenarios to be characteristic of the firm given that it is located in the Eurozone. The Euro is likely to see a sharp decrease in value and its long-term future is uncertain.
Another potential spread to use when it is necessary to adopt a conservative, risk-mitigating strategy is a butterfly spread. "The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts…. butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration" (Butterfly spread, 2013, The Options Guide).…
References
Bull spread. (2013). The Options Guide. Retrieved:
http://www.theoptionsguide.com/bull-spreads.aspx
Butterfly spread. (2013). The Options Guide. Retrieved:
http://www.theoptionsguide.com/butterfly-spread.aspx
Coplan, J.H. (2011). If Euro volatility hits your business: Steps businesses can take to counter swings in exchange rates. American Express. Retrieved: http://www.americanexpress.com/us/content/foreign-exchange/pdf/insights-archive/American_Express_FXIP.Jan.EuroVolatility.2_3_11.pdf
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