A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?
A) $74,000
B) $84,000
C) $75,000
D) $85,000

Question

Quizplus · Accepted Answer

Since the spot rate at maturity ($.85) is more favorable than the exercise price of the option ($.75), the corporation would not exercise the put option. Instead, it would convert the C$100,000 at the spot rate of $.85, receiving $85,000. The cost of the option premium ($.01 per C$) amounts to $1,000 (100,000 C$ * $.01), which needs to be subtracted from the $85,000, resulting in a net amount of $84,000.

A US Corporation Has Purchased Currency Put Options to Hedge a a 100,000