FAB Corp. will need 200,000 Canadian dollars (C$) in 90 days to cover a payables position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payables position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?

Question

FAB Corp. will need 200,000 Canadian dollars (C$) in 90 days to cover a payables position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payables position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?​

Quizplus · Accepted Answer

The correct answer is A because the net amount paid is $144,000. This is calculated by taking the exercise price of the call option ($.75) and multiplying it by the number of options needed (200,000), which gives us $150,000. We then subtract the premium paid for the call option ($.01), which gives us $149,000. Finally, we add the premium paid for the put option ($.01), which gives us $144,000.

FAB Corp Will Need 200,000 Canadian Dollars (C$) in 90 Days