Is Hedging Foreign Currency Bids with Options Desirable? An Applied Analysis for Small Firms
12 Pages Posted: 1 Nov 2015
Date Written: October 31, 2015
Companies that submit bids denominated in foreign currency but will not be informed of the winner of the bid for some time are exposed to foreign exchange gains or losses during the bid to award period. This paper explores the use of currency put options to hedge such a bid in euros, and evaluates the desirability of the hedge using a stylized empirical probability distribution as well as simulated data from actual results from 2008-2012. Both approaches indicate that an out-of-the-money hedge is often beneficial, and in particular a 10-delta put (which is the least costly of the most widely options) is recommended from this analysis.
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