I wrote a practice memo as follows, could you guys please give me your feedback as in the format is correct i.e. intro,body, conclusion etc and any other comments you might have, thanks a lot!!
This memo is in response to your inquiry regarding pros and cons of call and put options to mitigate your company’s foreign transactions risk.
A call option is the currency option hedge used to mitigate the transaction exposure associated with exchange rate risk for payables. A put option is the currency option hedge used to mitigate the transaction exposure associated with exchange rate risk for receivables.
An advantage of engaging in call and put options is that buyer of the option gains the right but not the obligation to engage in that transaction, while seller incurs the corresponding obligation to fulfill the transaction. Generally, if a call option price is less than the exchange rate at the time of settlement, the business will exercise its option. If the call option price is more than the exchange rate at the time of settlement, the business will allow the option to expire.
A disadvantage of engaging in call and put options is the premium paid to the originator of the options. While premium paid on expired options are consider sunk cost, the premium amount can add up quickly if there are numerous transactions and can be costly to the company.
I hope my explanation has been helpful in describing pros and cons of call and put option to mitigate your company’s foreign transactions risk. I understand that this topic can be very complex one; please contact me at your earliest convenience so that we may discuss any questions you might have.
Also, should i consider putting anything else in the heading or just start writing the memo as the simulation provided heading is sufficient enough?