FAB plc will need $200,000 in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of £0.57 and a premium of £0.01 is available. Also, a 90-day put option with an exercise price of £0.55 and a premium of £0.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is £0.52, what is the net amount paid, assuming FAB wishes to minimize its cost?
A) £106,000
B) £102,000
C) £116,000
D) £112,000

Question

Quizplus · Accepted Answer

The net amount paid is the premium paid for the put option, which is £102,000 (200,000 x 0.01 x 90/360).

FAB Plc Will Need $200,000 in 90 Days to Cover