A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?
A) $74,000.
B) $84,000.
C) $75,000.
D) $85,000.

Question

Quizplus · Accepted Answer

Dollars received from selling Canadian dollars in the spot market = C$100,000× $.85 = $85,000. Premium paid for options = C$100,000 × $.01 = $1,000. Amount of dollars received less premium = $84,000.

A US Corporation Has Purchased Currency Put Options to Hedge a a 100,000