172 INTERNATIONAL FINANCIAL MANAGEMENT
By buying a call option, the firm knows the maximum amount that it has to pay in home
currency and, at the same time, can benefit if the exchange rate ends up below the strike rate.
Similarly, an exporting firm may hedge its receivables or foreign currency inflows by buying
a put option. This will ensure that a minimum quantity of domestic currency is received for
foreign currency inflows. At the same time, the exporter may also benefit if the domestic cur-
rency price of the foreign currency becomes higher than the strike rate. Option contracts thus
protect the buyer or holder against adverse exchange rate movements without depriving the
firm of the opportunity to benefit from favourable exchange rate ...