Mender Co. 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)?
$330,000
$332,000
$327,000
$335,000
To hedge its receivables position, Mender Co. plans to purchase options.
For the call option, the exercise price is $.68 per Australian dollar, and the premium is $.02 per Australian dollar.
For the put option, the exercise price is $.66 per Australian dollar, and the premium is also $.02 per Australian dollar.
The spot rate in 180 days is $.67 per Australian dollar.
To calculate the amount received from the currency option hedge, we need to consider both the call and put options:
Call Option:
The spot rate in 180 days is $.67, which is lower than the exercise price of $.68. Therefore, the call option will not be exercised, and Mender Co. will not receive any additional funds from the call option hedge.
Put Option:
The spot rate in 180 days is $.67, which is higher than the exercise price of $.66. Therefore, the put option will be exercised, and Mender Co. will receive $.01 per Australian dollar as a hedge.
Amount received from the put option hedge = $.01 * 500,000 Australian dollars = $5,000
To calculate the amount received from the currency option hedge, we subtract the premium paid from the amount received from the put option hedge:
Amount received from the currency option hedge = Amount received from the put option hedge - Premium paid
Amount received from the currency option hedge = $5,000 - ($.02 * 500,000) = $5,000 - $10,000 = -$5,000
Therefore, the amount received from the currency option hedge is -$5,000.
However, since the answer options only provide positive values, we can assume that the amount received from the currency option hedge is $0.
To calculate the amount received from the currency option hedge, we need to consider two scenarios: one for the call option and one for the put option.
For the call option:
Exercise price = $0.68
Premium paid = $0.02
Spot rate = $0.67
If the spot rate in 180 days is below the exercise price ($0.67 < $0.68), Mender will exercise the call option.
Amount received = 500,000 * ($0.67 - $0.68) - premium paid
Amount received = 500,000 * (-$0.01) - $0.02
Amount received = -$5,000 - $0.02
Amount received = -$5,000.02
For the put option:
Exercise price = $0.66
Premium paid = $0.02
Spot rate = $0.67
If the spot rate in 180 days is above the exercise price ($0.67 > $0.66), Mender will not exercise the put option.
Therefore, Mender's amount received from the currency option hedge is $0. The options did not provide any benefit in this particular scenario.
The correct answer is none of the options provided. The amount received from the currency option hedge is $0.