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:

Spending Money

The act of using money to purchase goods or services or to fulfill personal needs and desires.

Happiness

Happiness refers to a condition of being content and well, marked by feelings that vary from satisfaction to extreme happiness.

Formulating Hypotheses And Predictions

The process of developing a testable statement or prediction about the relationship between two or more variables, often the initial step in conducting research.

Scientific Method

A systematic, organized series of steps that helps ensure objectivity and consistency in exploring a social or scientific question, including observation, hypothesis formation, experimentation, and conclusion.