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

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)?​

Quizplus · Accepted Answer

If Mender Co. wants to hedge against the risk, it should purchase the put option to sell AUD at a fixed rate of $.66. If the spot rate is lower than the exercise price, Mender Co. can exercise the option and sell AUD at the higher currency rate.

Here, the amount received from the hedge will be:

Amount received = (Exercise price - Spot rate) x Contract amount + Premium paid

Amount received = ($.66 - $.67) x 500,000 + $.02 x 500,000

Amount received = - $5,000 + $10,000

Amount received = $5,000

Therefore, the amount received from the currency option hedge (after considering the premium paid) will be $325,000 (i.e., $5,000 + $320,000). The correct answer is B.

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