Homework Answers
The question is relating to hedging the Currency risk through Currency Options.
As Ganado has a Receivable of 1 Million Euros the company would buy a put option for 1 Million Euros at the strike price of $ 1.1815 with a maturity of 3 months.
The price (premium) of this put option is 1.15% of strike price of $ 1.1815
Therefore, the price (premium) of this put option is
= 1.15% x $ 1.1815 = $ 0.0136 per Euro (Approx.)
The cost of buying put options for 1 Million Euros is
= Euros 1,000,000 x $ 0.0136 = $ 13,600 (Approx.)
This is immediate Outgo.
As the Spot Exchange Rate turns out to be $ 1.1830 after 3 months. ( Given in the Question that Spot Bid Rate to be used for calculating Put Option)
As the exposure of Ganado is relating to receivable therefore exchange is to be done in the market where the price of Dollar is higher.
On Comparing, Spot Rate $ 1.1830 with Strike price of Put Option $ 1.1815 it is beneficial to not exercise Put Option and Exchange Euros in Spot Market
Receivable Spot Market at Spot Rate of $ 1.1830 per Euro
= Euros 1,000,000 x $ 1.1830 = $ 1,183,000
However,Ganado has paid $ 13,600 to buy options contract
Therefore, Ganado Actual Receivable = Receivable in spot market - Premium paid to buy options contract = $ 1,183,000 - $ 13,600 = 1,169,400 (Approx)
Answer : Based on the above the OPTION A is correct choice.
Add Answer to:
sorr5 now its correct
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