An Australian company has payables of USD100,000, due in three months. The current AUD/USD exchange rate is 1.7900/1.8000. The expected exchange rate is 1.7500/1.7600 in three months' time. The three-month call with a strike of 1.7200 has a premium of AUD0.03. Calculate the estimated Australian dollar value of the payables if an options hedge is taken out.
A) 175,000
B) 172,000
C) 169,000
D) 176,000

Question

Quizplus · Accepted Answer

The correct answer is A because the estimated Australian dollar value of the payables if an options hedge is taken out is 175,000. This is calculated by multiplying the USD amount by the expected exchange rate and then subtracting the premium.

An Australian Company Has Payables of USD100,000, Due in Three