ZuoTi.Pro
Question

A firm wants to use a CALL option to hedge CAD 10 million in payable to...

A firm wants to use a CALL option to hedge CAD 10 million in payable to Canadian firms. The premium is $.02. The exercise price is $1.20 per CAD. At the expiration date, the spot rate is $1.05. What is the total amount of dollars your company has to pay(after accounting for the premium paid)? (think about whether this company want to exercise its call option or not)

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

At Expiry, Spot Rate is LESS THAN Strike Price. Therefore, Call is Out of the Money.

Call gives RIGHT to Buy at the Strike Price. BUT in this case, Spot Rate is lower than Strike Price. So, it is beneficial to Buy at Spot Rate from the market i.e. To NOT EXERCISE the Option.

Total Dollar Payable per CAD = Spot Rate + Premium Paid for the Option = 1.05 + 0.02 = $1.07

Total Dollars Payable = CAD Payable*Dollar Payable per CAD = 10 Million*1.07 = $10.7 Million

0 0
Add a comment
Know the answer?
Add Answer to:
A firm wants to use a CALL option to hedge CAD 10 million in payable to...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • A firm wants to use an option to hedge 10.5 million in receivables from Irish firms....

    A firm wants to use an option to hedge 10.5 million in receivables from Irish firms. The premium is $.02. The exercise price is $.50. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

  • 17. A firm wants to use an option to hedge 12.5 million in receivables from New...

    17. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

  • A U.S. company wants to use a currency put option to hedge 10 million Danish Krone...

    A U.S. company wants to use a currency put option to hedge 10 million Danish Krone (DKR) in accounts receivable due in six months. The premium of the currency put option with a strike price of $0.1333 per DKR is $0.01. The spot rate at the expiration is DKR7.20 per USD. The cost of capital for the company is 10%. What would be the net amount USDs received by the company in exchange for the DKR 10 million if the...

  • 1. A U.S. corporation has purchased currency call options to hedge a £75,000 payable in 9...

    1. A U.S. corporation has purchased currency call options to hedge a £75,000 payable in 9 months. The premium is $.02 and the exercise price of the option is $1.50. If the spot rate at the time of maturity is $1.65, what is the total amount paid by the corporation if it acts rationally? 2.A U.S. corporation has purchased currency put options to hedge a £150,000 receivable in 9 months. The premium is $.02 and the exercise price of the...

  • Consider a European call option on €62,500 with an exercise price of $1.50/€. You pay an...

    Consider a European call option on €62,500 with an exercise price of $1.50/€. You pay an option premium of $0.10/€ for the call option today. a. If the $-€ spot exchange rate is $1.62/€ on the contract expiration date, would you exercise the call option (buy € at the exercise price at expiration)? What would be the option payoff and profit? b. If the $-€ spot exchange rate is $1.45/€ on the contract expiration date, would you exercise the call...

  • Money Market Versus Put Option Hedge. Narto Co. (a U.S. firm) exports to Switzerland and expects...

    Money Market Versus Put Option Hedge. Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5% when investing funds and 7% when borrowing funds. The one-year Swiss interest rate is 9% when investing funds, and 11% when borrowing funds. The spot rate of the Swiss franc is $.80. Narto expects that the spot rate of the Swiss franc will be $.75 in one year. There...

  • Assume that Co. will need to purchase 100,000 Singapore dollars (SGD) in 180 days. Today’s spot...

    Assume that Co. will need to purchase 100,000 Singapore dollars (SGD) in 180 days. Today’s spot rate of the SGD is $.50, and the 180‑day forward rate is $.53. A call option on SGD exists, with an exercise price of $.52, a premium of $.02, and a 180‑day expiration date. A put option on SGD exists, with an exercise price of $.51, a premium of $.02, and a 180‑day expiration date. Company has developed the following probability distribution for the...

  • Assume that Brian Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today’s...

    Assume that Brian Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today’s spot rate of the S$ is $.50, and the 180‑day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180‑day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180‑day expiration date. Brian has developed the following probability distribution for...

  • A U.S. firm has a debt obligation of ¥ 194 million payable in one year. The...

    A U.S. firm has a debt obligation of ¥ 194 million payable in one year. The current spot rate is ¥ 116 per U.S. dollar and the one-year forward rate is ¥ 110 per U.S. dollar. Additionally, a one-year Call option on the Yen with a strike price of $0.0085 per yen can be purchased for a premium of 0.011 cent per yen. The risk-free money-market rate in Japan is 1.6% and the risk-free money-market rate in the U.S. is...

  • 110. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$)...

    110. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.02 per unit and the exercise price of the option is $.94. If the spot rate at the time of maturity is $.99, what is the net amount received by the corporation if it acts rationally? a. $92,000. b. $97,000. c. $96,000. d. $94,000. 111. A U.S. corporation has purchased currency call options to hedge a ₤70,000 payable. The premium...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT