Question

In: Finance

A U.S. firm expects receivables of €300,000 in three months. The U.S. firm purchases a put option on the euros.

A U.S. firm expects receivables of €300,000 in three months. The U.S. firm purchases a put option on the euros. The strike price is $1.20/€ and the premium is $.021/€. What is the total dollar amount received from the euro receivable if the spot rate in three months is (Multiply any $/€ amount by €300,000)

  • $1.13/€

  • $1.18/€

  • $1.23/€

  • $1.28/€

Solutions

Expert Solution

The U.S firm has Euro 300,000 receivable in 3 months. Therefore, the firm is afraid of the Euro falling. Therefore, to hedge against the same, it has bought put options on Euro. The strike price is $1.20/Euro. Therefore, if after 3 months the price of the Euro falls below $1.20, the firm will gain on the put options purchased otherwise the put options will lapse.

The amount of gain will be the difference in price for each Euro.

Let us say that the firm entered put options for Euro 300,000 only, therefore, the initial premium paid today is $.021 per Euro x 300,000 Euro = $6300.

Therefore, now let us build a table to see the total $ received by the firm based on the 4 outcomes given.

Situation $ Amount received

Put option

Exercised/Lapsed

Payoff from

options

Less:Initial Premium paid Total $ amount recieved.
1. $1.13/€

300,000 x 1.13

= $339,000

Exercised

($1.20-1.13) x 300,000

= $21,000

(6300) $353,700
2. $1.18/€

300,000 x 1.18

= $354,000

Exercised

$(1.20-1.18) x 300,000

= $6000

(6300)

$353,700

3. $1.23/€

300,000 x 1.23

= $369,000

Lapsed Nil (6300) $362,700
4. $1.28/€

300,000 x 1.28

= $384,000

Lapsed Nil (6300) $377,700

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