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22 March, 06:07

A U. S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

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  1. 22 March, 07:15
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    Amount received = $84,000

    Explanation:

    Canadian dollars received = $100,000

    To get the value in dollars multiply by the spot rate.

    Dollar value = 100,000 * 0.85 = $85,000

    Premium paid = Amount * premium rate

    Premium paid = 100,000 * 0.01

    Premium rate = $1,000

    Amount received = Total amount received - Premium rate

    Amount received = 85,000 - 1,000

    Amount received = $84,000
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