Question

DEF (French firm) will receive C$900,000 from one of its Canadian customers in three months. DEF decides to use put options to fully hedge its Canadian dollar receipt. Three month put options have 100,000 Canadian dollars attached. The options have an exercise price of 1.03 euros and a premium of .02 euros. Find DEF's profit/loss (in terms of euros) on their put option position if the exchange rate is .95 euros per Canadian dollar at expiration. 54,000 -54,000   6,000 -6,000

Answer 1

Exercise price of put option is 1.03 euros

Further premium is 0.02 euros

Breakeven is at 1.03-0.02=1.01 euros for put option

If exchange rate is 0.95 euros / canadian dollar, DEF makes 1.01-0.95=0.06 euros for every canadian dollar

So for 100000 canadian dollar, total profit = 0.06*100000 = 6000