The Tax Court held that a foreign currency call option
is not a foreign currency contract under the plain language of the IRC [section] 1256 contract mark-to-market rules.
A third hedging technique is the use of currency options, which come in two forms: (1) a currency call option allows for the purchase of a specified currency at a specified exchange rate within a specified expiration, (2) a currency put option allows for the sale of a specified currency at a specified exchange rate by a specified expiration date.
The more (less) certain the firm is of foreign currency appreciation, the more (less) likely that a forward or futures contract will be superior to currency call options (although there are exceptions).
03 due to a forward currency call option
and a loss of $0.
Scott, 1988, "Tests of the Black-Scholes and Constant Elasticity of Variance Currency Call Option
Valuation Models", Journal of Financial Research, 11:201-213
03 in EPS this quarter due to a forward currency call option
we entered into in anticipation of our France Medica purchase.
Convergys has partially offset the financial affect through the use of long-term foreign currency forward contracts for all three foreign currencies and a currency call option
on CADs with an aggregate notional value of $621 million as March 31, 2007.