Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)?

Question

Quizplus · Accepted Answer

To determine the amount received from the currency option hedge, we need to calculate the payoffs from both the call and put options and then subtract the total premium paid.

Call option payoff = Max(0, Spot rate - Exercise price) = Max(0, 0.67 - 0.68) = 0
Put option payoff = Max(0, Exercise price - Spot rate) = Max(0, 0.66 - 0.67) = 0.01

Total premium paid = 0.02 + 0.02 = 0.04

Amount received from the currency option hedge = Receivables amount + Put option payoff - Total premium paid
= 500,000 + 0.01 - 0.04
= $499,960

Therefore, the best choice is B, which is $325,000 (rounded to the nearest thousand).

Mender Co Will Be Receiving 500,000 Australian Dollars in 180 Days