A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (CAD) receivable. The premium is $0.01 per CAD and the exercise price of the option is $0.75 per CAD. If the spot rate at the time of maturity is $0.85 per CAD, what is the net amount of US dollar received by the corporation if it acts rationally, A) $74,000. B) $84,000. C) $75,000. D) $85,000.

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (CAD) receivable. The premium is $0.01 per CAD and the exercise price of the option is $0.75 per CAD. If the spot rate at the time of maturity is $0.85 per CAD, what is the net amount of US dollar received by the corporation if it acts rationally, A) $74,000. B) $84,000. C) $75,000. D) $85,000.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (CAD)
receivable. The premium is $0.01 per CAD and the exercise price of the option is $0.75 per CAD. If the
spot rate at the time of maturity is $0.85 per CAD, what is the net amount of US dollar received by the
corporation if it acts rationally,
A) $74,000. B) $84,000. C) $75,000. D) $85,000.

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Step 1: Calculation of Dollar received from selling canadian dollars in the spot market.

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Step 2: Calculation of Premium paid for options .

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Step 3: Calculation of amount of dollars received less premium.

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