The correct answer is: Hedging foreign currency loans.
Options are a type of derivative, which means that their value is derived from the value of another asset. In the case of options, the underlying asset is typically a stock, bond, or commodity. Options can be used to hedge against risk, or to speculate on the future price of an asset.
Hedging with options is best recommended for hedging foreign currency loans. This is because options provide a way to lock in a future exchange rate, which can protect against losses if the exchange rate moves against you. For example, if you have a loan denominated in euros, you could buy a put option on euros. This would give you the right to sell euros at a specified price in the future, even if the exchange rate falls below that price. This would protect you from losses if the euro falls in value.
Hedging receivables and payables can also be done with options, but it is not as common. This is because receivables and payables are typically much smaller than foreign currency loans. As a result, the potential losses from changes in exchange rates are also smaller. Additionally, hedging receivables and payables can be more complex than hedging foreign currency loans. This is because the value of receivables and payables can be affected by factors other than exchange rates, such as the creditworthiness of the buyer or seller.
Hedging contingency exposures is not typically done with options. This is because contingency exposures are typically very difficult to quantify. As a result, it is difficult to determine the appropriate option to hedge against the risk. Additionally, the potential losses from contingency exposures can be very large. As a result, hedging contingency exposures is typically done with other methods, such as insurance.