Question

A U.S. corporation has purchased currency catl options to hedge a 75,000 British pound pavable. The premium is 5,035 and the exereise pricc of the ontion is $135. If the spot rate at maturity is $1.45, what is the total amount paid by the corporation if it acts rationally? A)$11375 B)$101250 C)$98,625 D)$106.125 E)$103.875

Answer 1

The total amount paid by the corporation if it acts rationally is approximately $2,797,525.25.

Step-by-step explanation:

To hedge a 75,000 British pound payable, a U.S. corporation has purchased currency call options. The premium for the options is $5,035 and the exercise price is $135. If the spot rate at maturity is $1.45, we can calculate the total amount paid by the corporation as follows:

The number of contracts purchased = Payable amount / Exercise price = 75,000 / 135 = 555.55 (approx)

Total premium paid = Number of contracts * Premium = 555.55 * 5,035 = $2,797,525.25 (approx)

Therefore, the total amount paid by the corporation if it acts rationally is approximately $2,797,525.25.