A Firm Wants to Use an Option to Hedge 12

question 138

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:

Paid Out

This term typically refers to money that has been disbursed or expended, often relating to payments made for goods, services, debts, or claims.

Fidelity Bond

An employer’s insurance against an employee’s wrongful conduct.

Employer

An individual or organization that hires and pays for the services of workers.

Life Insurance

A contract between an insurer and an insured that guarantees payment to named beneficiaries upon the death of the insured.