FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $0.75 and a premium of $0.01 is available. Also, a 90-day put option with an exercise price of $0.73 and a premium of $0.01 is available. FAI plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is $0.71, what is the net amount received from the currency option hedge?

Question

Quizplus · Accepted Answer

FAI Corporation plans to purchase put option as it will give protection against the depreciation of the Canadian dollar. The exercise price of the put option is $0.73, so the minimum amount that FAI Corporation will receive is:

300,000 x $0.73 = $219,000

The premium paid is $0.01, which will reduce the net amount received:

$219,000 - $0.01 x 300,000 = $216,000

Therefore, the net amount received from the currency option hedge is $216,000.

FAI Corporation Will Be Receiving 300,000 Canadian Dollars (C$) in 90