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 a strike price of $1.65 per euro. They paid an option premium $0.01 per euro and the interest rate on the U.S. dollar is 5% per year. If at maturity the exchange rate is $1.70, the total proceeds to the firm are:
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$1,700,000 |
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$1,690,000 |
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$1,689,500 |
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None of the answers is correct. |
Option C is correct. 1,689,500
Since The actual Price is 1.70 the Put Option will not be exercised but Premium is paid that is to be subtracted from Gross proceeds along with the opportunity cost of premium paid
Net Proceeds = Gross proceeds - Premium Paid - Opportunity cost of Premium
= 1,000,000 * 1.70 - 1,000,000* 0.01 - 5%(1,000,000* 0.01)
= 1,700,000 - 10000 - 500
= $1,689,500
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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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