Depreciation or appreciation?

Rika Björk runs the currency overlay program at a large Scandinavian investment
fund, which uses the Swedish krona (SEK) as its reporting currency. She is managing
the fund’s exposure to GBP-denominated assets, which are currently hedged with a
GBP 100,000,000 forward contract (on the SEK/GBP cross rate, which is currently
at 10.6875 spot). The maturity for the forward contract is December 1, which is still
several months away. However, since the contract was initiated the value of the fund’s
assets has declined by GBP 7,000,000. As a result, Björk wants to rebalance the hedge
Next Björk turns her attention to the fund’s Swiss franc (CHF) exposures. In order
to maintain some profit potential Björk wants to hedge the exposure using a currency
option, but at the same time, she wants to reduce hedging costs. She believes that
there is limited upside for the SEK/CHF cross rate.

Given her investment goals and market view, and assuming all options are
based on SEK/CHF, the best strategy for Björk to manage the fund’s CHF exposure would be to buy an:
A ATM call option.
B ITM call option and write an OTM call option.
C OTM put option and write an OTM call option.

C is correct. The fund holds CHF-denominated assets and hence Björk wants to protect against a depreciation of the CHF against the SEK, which would be a down-move in the SEK/CHF cross rate. An OTM put option provides some downside protection against such a move, while writing an OTM call option helps reduce the cost of this option structure.

My question is: how do we know she wants to protect against a depreciation of the CHF? To be honest, I thought this was rather about protecting against an appreciation of CHF against the SEK.

Presumably, she’s long CHF. (It would have been nice if they’d made that explicit.)

When you’re long an asset you want it to appreciate. Or so I’m told.