Question

Suppose that you wish to hedge the exchange rate risk on a foreign receivable of 1,240,000 euros. You decide to do this with a long option whose underlying asset is the euro (I won't tell you whether it's a put or a call). If this option has a strike of $1.15/euro, a multiple of 10,000 euros, and a per-contract (i.e. per 10k euros) premium of $175, then what is the least number of dollars you could possibly expect to net from this hedged receivable

Answer 1

Answer: $1404300

Step-by-step explanation:

The least number of dollars that one could possibly expect to net from this hedged receivable will be calculated thus:

Amount receivable = 1,240,000 euros

Contract size for put option = 10000

Therefore, the number of contract that can be purchased will be:

= 1240000 / 10000

= 124

The total cost of option will be:

= $175 × 124

= $21700

We then calculate the minimum dollars available which will be:

= 1240000 × 1.15

= $1426000

We then deduct the total cost of option to get the net dollar proceed which will be:

= $1426000 - $21700

= $1404300

Therefore, the the least number of dollars that is expected to net from this hedged receivable is $1404300.