Assume CNY/USD exchange rate. If we have holdings in CNY and want to protect against USD depreciation, why do we want to buy put option?
If USD depreciates, won’t we buy more USD with CNY (which is good), and better buy call options to hedge the CNY exposure?
Also, BRL/USD. If we expect BRL to appreciate and want to construct a bull spread, why we would long BRL/USD = 5, and short BRL/USD = 6?
If BRL appreciates, won’t BRL/USD decrease, because now USD buys less BRL? And bull spread will should be long 6 call and short 5 call?
I find it is very poor wording. If we long USD and want to hedge against the depreciation of USD, we should buy put option on CNY/USD. But it is not the case when we hold CNY.
Hedge the currency exposure to China by using the CNY/USD protective put
exchange rate option strategy to protect against USD depreciation.
This is a correct statement from multiple choices question.
Whether it’s buying call or put, it’s very important to know what’s the base currency and what’s the price currency. First, confirm the notation in the question - whether it’s USD/CNY or CNY/USD.
With a long exposure in CNY (investments or assets in CNY):
- if base is CNY i.e. USD/CNY: you will buy put (if CNY depreciates you are protected by the put)
- if base is USD i.e. CNY/USD: you will buy call (if USD appreciates you are protected by the call)