Question

A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid to hedge, the U.S. firm bought put options on the euro with a strike price of $1.45 per euro They paid an option premium $0.02 per euro. If at maturity, the exchange rate is $1.40,

	a. none of the other answers
	b.	the firm will realize $1,450,000 on the sale net of the cost of hedging.
	c.	the firm will realize $1,430,000 on the sale net of the cost of hedging.
	d.	the firm will realize $1,400,000 on the sale net of the cost of hedging

Answer 1

	Euro receivable =	1,000,000
i	Option premium =	$      20,000
	$0.02=
ii	On expiry USD received=
	1000000*1.45		1,450,000
iii=ii-i	Firm will realized	$ 1,430,000
	answer = option c)
	the firm will realize $1,430,000 on the sale net of the cost of hedging