Question

A firm wants to use a CALL option to hedge CAD 10 million in payables to Canadian firms. The premium is $.02. The exercise price is $1.10 per CAD. At the expiration date, the spot rate is $1.25. What is the total amount of dollars your company has to pay(after accounting for the premium paid)?
(think about whether this company want to exercise its call option or not)

Please provide explanation and work.

Answer 1

Call option exercise price 1 Can dollar= $1.10

Spot rate on expiration=$1.25

Value of call option = Spot rate at expiration - Exercise price

=1.25-1.10

=0.15

Company has to buy 10 million CAD at Spot rate @ 1.25.

Total amount paid = 10,000,000* 1.25 = -$12,500,000

premium paid 10,000,000* 0.02 =    -$200,000

Value of call option Received 10,000,000*0.15 = $1,500,000

____________

Total amount paid -$11,200,000

So, Total amount of dollars paid will be $11,200,000 or $11.2 millions