Question

You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $0.02 per unit and an exercise price of $0.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:

The 180-day forward rate of the Australian dollar is $0.50.

What is the probability that the forward hedge will result in more dollars received than the options hedge?

a. 20%

b. 50%

c. 0%

d. 100%

e. None of these choices are correct.

Answer 1

Ans:

American Dollar Receivable : 350,000

Put Option Strike Price : $0.50 per American Dollar

Forward Price : $0.50 per American Dollar

So if the future Price fall below $0.50 in Put option we have a right to sell at $0.50 and if price rises above $0.50 we can sell at higher rates. But in Forward contract we can sell @ fix $0.50.

So it is 0% Chance that forward exchange will give more Dollars than Options.

So correct answer is Option C.

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