A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
A) $6,875,000.
B) $7,250,000.
C) $7,000,000.
D) $6,500,000.
E) none of the above

Question

Quizplus · Accepted Answer

The firm will receive:

12.5 million x $.55 = $6,875,000

However, they paid a premium of:

12.5 million x $.03 = $375,000

So the total amount received is:

$6,875,000 - $375,000 = $6,500,000

A Firm Wants to Use an Option to Hedge 12