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

---

Definitions:

Warrants

Legal documents issued by a court or government official authorizing the police or another body to make an arrest, search premises, or carry out some other action relating to the administration of justice.

Consideration

Something of value exchanged between parties as part of a contract, which is required for the contract to be legally binding.

Holder

Someone who legally possesses a negotiable instrument, such as a check or bond, and has the right to enforce it.

Instrument

In legal and financial contexts, a formal document like a contract, will, or negotiable instrument that establishes legal rights and obligations.