On March 1, Chow Corporation Entered into a Firm Commitment

question 22

Multiple Choice

On March 1, Chow Corporation entered into a firm commitment to purchase specialized equipment from the Gifu Trading Company for ¥80,000,000 on June 1. The exchange rate on March 1 is ¥100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars, Chow pays $20,000 for a call option contract. This contract gives Chow the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on June 1. On June 1, the exchange rate is ¥105 = $1. How much did Chow save by purchasing the call option (answers rounded to the nearest dollar) ?

• A) $20,000
• B) $27,619
• C) $47,619
• D) Chow would have been better off not to have purchased the call option.

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Definitions:

Mathematics Test

An examination designed to assess one's knowledge or proficiency in mathematics.

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A statistical distribution that is symmetric and bell-shaped, describing how continuous data is distributed around the mean.

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Normal Model N(73,9.2)

A specific normal distribution with a mean of 73 and a standard deviation of 9.2.