Question

lemons corp. will receive 451,000 Singapore dollars (SGD) in 60 days. The current spot rate is USD 1.0817/SGD. The 60-day European call options on the Singapore dollar with an exercise price of USD 1.2572/SGD are traded with a premium of USD 0.08 while the 60-day European put options on the Singapore dollar with an exercise price of USD 1.2818/SGD are traded with a premium of USD 0.05. Suppose, Clemons corp. wants to hedge its position using options. If the spot rate in 60 days is USD 1.4298/SGD, determine the company’s net receipt in USD if it acts rationally.

Select one:

a. 622,290

b. 644,840

c. 686,602

d. 722,682

Answer #1

Lemons corp will receive 451,000 Singapore dollar in 60 days.

Premium on put options = USD 0.05

Exercise price = USD 1.2818/SGD

Spot rate in 60 days = USD 1.4298/SGD

Here the spot rate in 60 days is higher than exercise price of put option, therefore Lemons corp will sell the SGD in the market at spot rate in 60 days

Lemons corp will get

SGD 451,000 × 1.4298 = USD 644,840

Net receipt in USD = Amount received at 60 days spot rate - Premium on put option

= USD 644,840 - USD(451,000 × 0.05)

= USD 644,840 - USD 22,550

= **USD** **622,290**

**Option a** is the correct answer.

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