Explain benefits of currency option contract as hedging tool, Financial Management

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What are the advantages or benefits of a currency options contract as a hedging tool compared with the forward contract?

Answer:  The major advantage of by using options contracts for hedging is that the hedger can decide whether to exercise options on observing the realized future exchange rate. So Options provide a hedge against ex post regret that forward hedger might have to suffer. Hedgers can only remove the downside risk whereas retaining the upside potential.


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