Suppose we need to hedge an exposure to KRW currency risk.
We need to buy or sell which option on the exchange rate USD/KRD?
Are we talking South Korean Won (KRW), or Kuwaiti Dinar (KWD)? I’m not sure what KRD are.
In any case (let’s go with KRW), it depends on whether you have a long position or a short position in KRW.
Think of KRW as a commodity; say, oil, priced in USD/bbl.
If you’re long oil (i.e., you’re going to receive oil in the future), then you want to protect yourself in case the price of oil decreases; you would buy put options on oil. So, if you’re long KRW (i.e., you’re going to receive KRW in the future), then you would buy put options on USD/KRW (which is the same as buying call options on KRW/USD).
If you’re short oil (i.e., you’re going to deliver oil in the future), then you want to protect yourself in case the price of oil increases; you would buy call options on oil. So, if you’re short KRW (i.e., you’re going to deliver KRW in the future), then you would buy call options on USD/KRW (which is the same as buying put options on KRW/USD).
Note that you _ never _ sell options in this case; you cannot protect yourself by giving someone else the option to take your money.
I mean KRW (won), KRD is a typo.
I see, so we should consider whether the position is long or short. The answer is very clear for me. Thanks a lot S2000magician.
I knew what you meant; I was just messing with you.
Yes: you need to consider whether the position is long or short.
You’re quite welcome, my friend.
So if we have a long exposure to KRW, we should buy KRW put. Alternatively, can we buy USD call?
They’re the same thing.