ABC Corporation, located in Canada, has an accounts receivable of SF 1 million to be received in one year. The current spot rate is $0.80/SF and the six-month forward rate is $0.82/SF. The one year interest rates are 4.5 percent and 2 percent in Canada and Switzerland respectively. A one-year call option on Swiss franc at the strike price of $0.81 per Swiss franc for a premium of 0.2 cent per Swiss franc is available.
-Assume that the forward rate is the best predictor of the future spot rate.The expected future dollar amount of this receivable using the option hedge is:
A) $799,100
B) $800,000
C) $810,100
D) $820,000

Question

Quizplus · Accepted Answer

Option premium = $0.02*1,000,000= $20,000The future value of the option premium is:= $20,000(1.045)= $20,900At the expected future spot rate of $0.82, which is higher than the exercise price of $081, ABC let the put option expireThe total expected amount will be:= $820,000 - $20,900= $799,100

ABC Corporation, Located in Canada, Has an Accounts Receivable of SF