Question

As a financial advisor at Morgan Stanley, you are advising a client on the costs and benefits
of hedging a transaction with options. Your client, a U.S. exporter, is scheduled to receive
a payment of €7,000,000 on April 20, 45 days in the future. Assume that your client can
borrow and lend at a 7% p.a. U.S. interest rate. Use the appropriate American option with
an April maturity and a strike price of 120¢/€ to determine the dollar cost today of hedging
the transaction with an option strategy. The cost of the call option is 3.98¢/€, and the cost
of the put option is 1.10¢/€. Assuming a 360-day year, what is the minimum dollar revenue
your client will receive in April? Remember to take account of the opportunity cost of doing
the option hedge.
A. $8,400,000.00
B. $8,544,899.45
C. $8,244,798.25
D. $8,322,326.25
E. None of the above

Answer 1

Option D is correct below are my calculations:

To hedge the revenue, we must purchase put option, this will put a floor to the revenue:

=7,000,000*0.0110

=77,000

Net dollar Amount=7,000,000*1.20 - 77000(1+0.07*45/360

                             =8400000-77673.75

                             =8322326.25