Page 286 , section 3 shows a strategy of hedging economic exposure to a foreign stock
can someone pl. help me undestand how the strategy of investing in options in a foreign company is better than investing in shares of the company , to mitigate foreign currency risk
I am trying to guess if there is an economic reason it works better. It is eluding me completely
I think after reading it again I understood . The economic impact is only felt in the profits if you use options . The base ( or initial) price is not exposed to translation risk because you only own gains , never the principle.
Same with buying index futures of a foreign stock index . Only margin amount out the the principle is exposed which is usually small and can be efficiently hedged.
say you’re a US investor and you want to buy a german stock. It costs 50 euros for a share or 1 euro for an option. if you buy the share you are 50x more exposed to currency movement than on the option.