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Linda_us
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US corporation has purchased currency put options yo hedge

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US corporation has purchased currency put options yo hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?
HiCustomer

Since the spot rate is more than the option rate the US corporation won't exercise the option and would convert the 100,000 Canadian Dollar at spot rate.

It would receive = 100,000*.85 =USD 85,000

Premium paid for contract = 100,000*.01 = 1000 USD

Net amount received (after premium) = USD 85000 -USD 1000 = USD 84000.

Regards

Linda

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