Question

A U.S. corporation has purchased currency call options to hedge a 70,000 British pound payable. The premium is $.035, and the exercise price of the option is $1.30. If the spot rate at the time of maturity is $1.45, what is the total amount paid by the corporation if it acts rationally

Answer 1

Answer: $93450

Explanation:

The total amount paid by the corporation if it acts rationally will be calculated thus:

Dollars required to pay for 7000 pounds will be: = 70000 × $1.30 = $91000

Premium paid for buying option = 70000 × $0.035 = $2450

Amount of dollars paid = $91000 + $2450 = $93450

Therefore, the total amount paid by the corporation if it acts rationally is $93450.