Optimal Put Currency Option Size for an Uncertain Convertible Amount

Currency options have been used by risk averse firms to cover foreign exchange exposure, to profit from favourable exchange rate movements and to hedge the binary bidding situation. The aim of this paper is to establish a wider scope for currency options as a hedging tool for cases where the convertible amount is uncertain. The most appropriate option size derived using the concept of risk minimization is shown always to exceed the expected uncertain convertible amount.