Question

You are the treasurer of Arizona Corporation and must decide how to hedge (if at all)...

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.

Homework Answers

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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