A Canadian exporter will receive $10 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 1.25 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.26 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

Question

Quizplus · Accepted Answer

The firm would have lost $10 million * (1.26 - 1.25) = $100,000 if it had remained unhedged. However, it bought a put option for 0.0115CAD per put on 1 USD, which means it paid 0.0115CAD * 10 million USD = $115,000 for the option. Therefore, the firm lost $115,000 - $100,000 = $15,000 from hedging with the option, compared to remaining unhedged.

A Canadian Exporter Will Receive $10 Million USD in September,and