Hedging Long or Short Positions with Options . If Ford is owed Japanese yen by Nissan in payment for exported parts, and buys a yen put to hedge the currency exposure, the company has created a synthetic long call. In general, combining an underlying currency position with a long call or put creates the equivalent of a long position in the opposite option. The sum of the two is equivalent to buying a call. Instead of reducing or eliminating risk, as the spin-doctors would claim, this strategy actually creates another risk exposure.
Options are a great hedge against accounting exposure.
This is surely one of the most pervasive of the six myths. It is the conventional wisdom that if a firm has an accounting exposure in a foreign currency that does not correspond to its economic exposure then they will incur translation gains and losses as the currency rises or falls. The popular remedy for this is to buy forward contracts. There is a fly in the ointment, however. Because the translation gains are bookkeeping entries, while the forward contract may produce real cash losses, which can be hard to justify.