Explain options by an example?
Case of an exporter:
You have secured a export order against which money would be received say after 6 months. Current USDINR part is 69 and you are not sure what the rate would be after 6 months. In such a situation, you may buy an option and protect the risk of INR getting stronger and going below say 69. For buying option, you pay premium of say Rs 1/ USD. After six months, if USDINR is below 69 and is say at 65, you sell your export proceeds at 65 and claim Rs 4/ USD(69-65) from bank. However, if USDINR is above 69 and is say at 72 (currency has not moved against you). In such situation, the premium paid goes as expense and you sell your export proceeds at 72.
