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A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the...

A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on the euro with an exercise price of $1.65. If at maturity, the exchange rate is $1.60, what is the payoff of the firm?

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Answer #1

The payoff of the firm is computed as shown below:

= ( Exercise price - Exchange rate at maturity ) x 1,000,000

= ( $ 1.65 - $ 1.60 ) x 1,000,000

= $ 50,000

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