Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)?

Question

Quizplus · Accepted Answer

To hedge its receivable position, Mender Co. would buy a call option to protect against the Australian dollar depreciating. With the spot rate at $.67 in 180 days, the call option with an exercise price of $.68 would not be exercised because the spot rate is more favorable. Thus, Mender would exchange the currency at the spot rate of $.67. The amount received would be 500,000 * $.67 = $335,000. However, the premium paid for the call option is $.02 per Australian dollar, which amounts to 500,000 * $.02 = $10,000. Therefore, the net amount received after considering the premium paid is $335,000 - $10,000 = $325,000.

Mender Co Will Be Receiving 500,000 Australian Dollars in 180 Days