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.
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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