On June 18,Burger Corporation entered into a firm commitment to purchase specialized equipment from the Hyabuza Trading Company for ¥80,000,000 on August 20.The exchange rate on June 18 is ¥100 = $1.To reduce the exchange rate risk that could increase the cost of the equipment in U.S.dollars,Burger pays $12,000 for a call option contract.This contract gives Burger the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on August 20.On August 20,the exchange rate is ¥93 = $1.How much did Burger save by purchasing the call option (answers rounded to the nearest dollar)?
A) $12,000
B) $48,215
C) $60,215
D) Burger would have been better off not to have purchased the call option.

Question

Quizplus · Accepted Answer

Burger saved $48,215 by purchasing the call option. Without the option, the cost in USD would have been $80,000,000 / 93 = $860,215. With the option, the cost was $80,000,000 / 100 = $800,000. The difference is $860,215 - $800,000 = $60,215, minus the $12,000 cost of the option, resulting in net savings of $48,215.

On June 18,Burger Corporation Entered into a Firm Commitment to Purchase