Question

Your small US multinational business forecasts a 60,000 Euro revenue in 6 months. You hedge 100% of the revenue using put options with the strike price set at the EUR forward rate of 1.20. (The premium cost of the call options is assumed to be zero for this question).  If the actual EUR foreign exchange rate in 6 months is 1.35, then what would be the US dollar gain or loss on your hedge (step 2)?

		$0 gain or loss
		$9,000 gain
		($9,000) loss
		($7,500) loss

Answer 1

Solution:

Put option of 1 Euro = 1.20 USD is taken for Hedging for 6 month period

But actual price after 6 month is being 1 Euro = 1.35 USD.

It means that the USD price is above the PUT option taken of USD 1.20/ Euro

Hence the Put Option will not be excercised by put buyer and therefore there is NO Gain or Loss form this hedging.

Correct Answer is option (a) 0 Gain or Loss.

(Note :It is given in the question that the premium price is considered to be Zero for this question.)