Which of the following would be an effective hedging when passthrough =0.8?
What is an effective hedging strategy when passthrough =0.8 and why is it important to choose the right hedging method?
Effective Hedging Strategy
Explanation
Effective hedging involves taking an offsetting position in a related security to minimize risks. In the given options, buying €24.75 million forward would be the most effective hedge when passthrough = 0.8. A forward contract allows the purchase or sale of an asset at a future date at a predetermined price, which in this case is €24.75 million.
Buying put options on E with a total contract size close to €24.75 million may seem like a viable option, but it is not as effective as buying forward in this scenario. Put options provide the right to sell an asset at a specified price within a set timeframe, which may not fully offset the potential losses at passthrough = 0.8.
Therefore, selecting the right hedging method, such as buying €24.75 million forward, is crucial to mitigate risks effectively and protect the value of assets in a volatile market environment.