Option holders can choose whether to exercise or not according to market conditions when the option expires. For example, if the borrower buys a dollar call option, if the market exchange rate is lower than the exercise exchange rate, he cannot exercise and buy foreign exchange at the market exchange rate; On the other hand, the right to purchase foreign exchange at the agreed exchange rate can not only prevent exchange rate risks when the host country's currency depreciates, but also enjoy the exchange gains brought by the appreciation of the host country's currency.
Take the portfolio of risk reversal options as an example: suppose that the current exchange rate of USD against L currency is 6.2, the borrower buys 1 year USD call option, the exercise exchange rate is 7.0, and the option fee expenditure is 0.6%; At the same time, sell the dollar put option with the same amount and the same term at the exercise price of 6.5, assuming that the option fee income is 0.6%.