A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?
A) $33,600.
B) $46,900.
C) $44,100.
D) $36,400.

Question

Quizplus · Accepted Answer

Dollars paid when exercising the option = £70,000 × $.50 = $35,000. Premium paid for options = £70,000 × $.02 = $1,400. Amount of dollars paid = $35,000 + $1,400 = $36,400.

A US Corporation Has Purchased Currency Call Options to Hedge a a 70,000