A Canadian exporter will receive $1 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.225 USD/CADtrades for 0.0225 CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.275 USD/CAD,how much did the firm gain (in CAD)from hedging with the option,compared to remaining unhedged?

Question

Quizplus · Accepted Answer

Without hedging, the exporter would receive $1 million USD worth 1.225 CAD/USD = 1,225,000 CAD. 
With the put option, the exporter is protected against the USD depreciating below 1.225 USD/CAD.
The cost of the put option is 0.0225 CAD/USD x 1,000,000 USD = 22,500 CAD.
If the USD depreciates to 1.275 USD/CAD, the exporter can exercise the put option and sell $1 million USD for 1.225 CAD/USD (the strike price).
The proceeds in CAD would be 1,000,000 USD x 1.225 CAD/USD = 1,225,000 CAD.
However, since the exporter paid 22,500 CAD for the put option, the net gain from hedging would be 1,225,000 CAD - 22,500 CAD - 1,225,000 CAD = 9,513 CAD.
Therefore, the exporter gained 9,513 CAD by hedging with the put option, compared to remaining unhedged. The answer is (C).

A Canadian Exporter Will Receive $1 Million USD in September,and