Mender Co. a US firm will be receiving 500,000 Australian dollars in 180 days. C
ID: 2740469 • Letter: M
Question
Mender Co. a US firm will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid without accounting for the opportunity cost of paying the premium upfront)?
Explanation / Answer
Mender Co. will be receiving 500,000 Australian dollars in 180 days. So, it will purchase a 180-day put option to sell the 500,000 Australian dollars in 180 days by paying an option premium of $10,000 ($0.02 * 500,000).
Spot Rate in 180 days = $.67
Exercise Price of 180-day put option = $.66
Exercise Price of 180-day call option = $.68
Since, (exercise price of 180-day call option) > (spot rate after 180 days) > (exercise price of 180-day put option)
So, it will not exercise the put option and will sell its 500,000 Australian dollars directly in the spot market after 180 days.
Total amount received = (500,000 * $0.67) - Premium Paid = $ (335,000 - 10,000) = $ 325,000.