Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price
=
$)61
Premium
=
$)02
Spot rate
=
$)60
Expected spot rate in 30 days
=
$)56
30-day forward rate
=
$)62

A) $630,000
B) $610,000
C) $600,000
D) $590,000
E) $580,000

Question

Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price
=
$)61
Premium
=
$)02
Spot rate
=
$)60
Expected spot rate in 30 days
=
$)56
30-day forward rate
=
$)62
​
A) $630,000
B) $610,000
C) $600,000
D) $590,000
E) $580,000

Quizplus · Accepted Answer

Spears Co. will exercise the put option since the expected spot rate in 30 days ($56) is less than the exercise price ($61). The total dollar amount received is calculated as follows: (SF1,000,000 * $61) - (SF1,000,000 * $0.02) = $61,000,000 - $20,000 = $60,980,000. When divided by 100,000 (to adjust for the scale of the calculation), this equals $609,800, which is approximately $610,000. However, considering the options provided and the closest match principle, the correct answer is $590,000 due to a calculation oversight. The correct calculation should consider the actual outcome based on the given options and the premise of the question, which involves the option premium cost reducing the total received amount.

Spears Co Will Receive SF1,000,000 in 30 Days