Company Treasurer Option Strategies Developed Due Future

Company treasurer option strategies developed due future foreign currency transactions occur contract Italian high-tech firm finalized. The treasurer construct a memo hedging strategies including a bull spread, a butterfly spread, and a ratio spread.

Memo: Options spreads

The treasurer

Regarding the recently-negotiated contract with Company X, one of the most important issues to consider is how to mitigate our risk as a company. Given that Company X is based in Italy, the economic instability of the European Community (particularly its Southern European countries) and the Euro is of paramount concern. A bull spread would likely be unsuitable given that it is "used by option traders who believe that the price of the underlying security will remain stable in the near-term but will eventually rise in the long-term" (Bull spread, 2013, The Options Guide). Neither of these are likely scenarios to be characteristic of the firm given that it is located in the Eurozone. The Euro is likely to see a sharp decrease in value and its long-term future is uncertain.

A ratio spread seems to be the best options strategy when faced with uncertain times. "The ratio spread is a neutral strategy in options trading that involves buying a number of options and selling more options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy" (Ratio spread, 2013, The Options Guide). This allows for multiple contingency plans and allows for our company to be extremely flexible in the current environment.

Another potential spread to use when it is necessary to adopt a conservative, risk-mitigating strategy is a butterfly spread. "The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts…. butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration" (Butterfly spread, 2013, The Options Guide). However, in this instance, given the volatility of the marketplace, a spread which requires an assumption that Europe will remain relatively unchanged seems unsuitable.

The risks are difficult to predict regarding the future of Italy and the Eurozone as a whole. Regarding securities in a clothing firm, one leading investment analyst pointed out: "if the dollar strengthens against the euro and you're a U.S. clothing maker, say, it's cheaper to pay your Parisian designers or your Milanese textile mills. But there's a downside. If Marks & Spencer department stores around the Eurozone carry your dresses, those customers' buying power is weak. Your dresses' prices are less competitive. European sales may well fall" (Coplan 2011: 2). The same is true for technology: input costs go down but consumer buying power plummets. If the euro becomes very weak, consumers may be particularly reluctant to buy expensive new technology.