Question

A U.S firm has sold an Italian firm E1,000,000 worth of product. In one year the U.S firms get paid. To hedge, the us firm bought put options on the euro with a strike price of 1.65. They paid an option premium $0.01 per euro. If at maturity, the exchange rate is 1.60. What will the firm realize the sale net of the cost of hedging?

Answer 1

The firm will realize $1,640,000 on the sale net of the cost of hedging.

If at maturity:
Strike price = $1.65
Exchange rate = $1.60
Option premium = $0.01 per euro

In this case, the put option is in favour of U.S. firm. Therefore, the U.S. firm will exercise the put option.

Net proceeds per euro = Stike price - Option premium
= $1.65 - $0.01
= $1.64

Net amount realized = €1,000,000 x 1.64
= $1,640,000.00