A US Corporation Has Purchased Currency Call Options to Hedge a a 70,000

question 17

Multiple Choice

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

• A) $33,600.
• B) $46,900.
• C) $44,100.
• D) $36,400.

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Definitions:

Callable Bond

A type of bond that gives the issuer the right to repay the bond before its maturity date, typically at a predefined call price.

Deferred Call Period

A time frame during which a company cannot redeem a callable security, usually a bond, prior to a specified date.

Date Of Issue

The specific date on which a financial instrument, such as a bond or a stock, is issued to the public or enters the market.

Fisher Effect

An economic theory suggesting that the real interest rate is independent of monetary measures, with the nominal interest rate adjusting to expected inflation.