Hedging with Options
Currency options might be a suitable method of hedging a currency exposure for the option buyer, who can
Lock in worst possible exchange rate to avoid the risk of an adverse rate movement, and at the same time
Benefit from any favorable rate movement by choosing not to exercise the option, and instead buying or selling the currency at the spot rate on expiry.
If currency options are bought to hedge a currency exposure, the buyer must feel
The risk reduction justifies the premium cost
An option is preferable despite its cost compared to other alternatives, such as the (zero-cost) forward exchange contract.