A Firm Wants to Use an Option to Hedge 12

question 28

Multiple Choice

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid) ?

• A) $6,875,000.
• B) $7,250,000.
• C) $7,000,000.
• D) $6,500,000.
• E) none of the above

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Definitions:

Dividends Received

Payments received by an investor or a company from owning shares in another company.

Corporation Owns

Assets or property held by a corporation, which can include cash, inventory, equipment, and real estate.

Premium Or Discount

Refers to the amount by which the selling or purchase price of a financial instrument differs from its face value.

Amortized

The process of gradually reducing the cost of an intangible asset through systematic charges to expense over its useful life.