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 should buy put options to hedge against the Canadian dollar depreciating below the exercise price. The put option allows them to sell C$ at $0.73. The net amount received is calculated as follows: (300,000 C$ * $0.73) - (300,000 C$ * $0.01 premium) = $219,000 - $3,000 = $216,000.

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