U.S. corporations now use options strategies to protect their euro-denominated revenues because the dollar shows signs of stability while the euro’s rally seems to be fading. The euro experienced a significant increase this year because of U.S. trade policy concerns and decreasing faith in American exceptionalism.
Some firms are acquiring euro put options to protect their overseas earnings because U.S. equities have recovered and macroeconomic data has exceeded expectations. The derivatives increase in value when the euro depreciates which protects foreign earnings from dollar devaluation during currency conversion.
Eric Merlis from Citizens observed that clients choose to buy euro put options for protection against potential currency declines because they doubt the euro will continue its upward trend.
The euro-dollar options market traded $803 billion in June which represented a slight decrease from April’s record volume. The market participants are now closing their short-dollar positions which were widely held during the first part of the year. The euro faces resistance between $1.18 and $1.20 while most firms expect a limited dollar appreciation.
