A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
A) $6,875,000.
B) $7,250,000.
C) $7,000,000.
D) $6,500,000.
E) none of the above

Question

Quizplus · Accepted Answer

Dollars received from exercising option = NZ$12.5 million × $.55 = $6,875,000. Premium paid for options = NZ$12.5 million× $.03 = $375,000. Amount of dollars received minus premium = $6,500,000.

A Firm Wants to Use an Option to Hedge 12