Question

Suppose your firm will export to Peru (currency Peruvian New Sol [PEN]) and will receive PEN 750,000 in 90 days. Put options with a strike price of USD .300 are available for a premium of USD .025 per unit. Your firm decides to hedge its exposure by purchasing Put options. Suppose in 90 days the spot rate is USD .315 / PEN. Your net cash inflow from this transaction is:

Answer 1

A firm expot to peru suppose to recieve payment in 90 day in currency of peru (pen) amount 750000 pen

Company want to hedges itself afraid of falling pen

Put option available in making woth strike price of .300 us$ /pen

Primium = us $.025 per unit

So cost of pot option = 75000*.025

                         = 18750

In 90 day suppose rate become .315 us$ /pen than we would not excercise option because in open market we are getting more what options give us right.

Net cash flow of transection

We received 750000 pen convert in is $ in open market @.315 $ per pen so we get

                    750000*.315 = 236250$

Less cost of options.      .    ( 18750)

Net cash inflow.                 217500$

So net cash inflow form transection is us$ 217500