Foreign Currency Options
The foreign currency option is unique among the hedging alternatives due to its kinked-shape value line. If Herr Ruhnau had purchased a put option on marks at DM3.2/$, he could have obtained what many people believe is the best of both worlds. If the dollar had continued to strengthen above DM3.2/$, the total cost of obtaining $500 million could be locked in at DM1.6 billion plus the cost of the option premium, as illustrated by the flat portion of the option alternative to the right of DM3.2/$. If, however, the dollar fell as Herr Ruhnau had expected,