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10 A multinational firm buys a put option in anticipation of receiving SF1 million one period from now. Today, the one-period put is quoted US$0.01 per SF for an exercise price of US$0.60 (a contract is worth SF62,500). a If the spot price at maturity is US$0.585/SF, should the firm exercise the option? b What is the net US dollar receipt for the firm one period from now? c As a banker to the firm, what alternative courses of hedging actions would you initially suggest to the firm? d Under what circumstances is a course of action likely to be (i) the cheapest for the firm and (ii) also most profitable for your bank?

10 A multinational firm buys a put option in anticipation of receiving SF1 million one period from now. Today, the one-period put is quoted US$0.01 per SF for an exercise price of US$0.60 (a contract is worth SF62,500). a If the spot price at maturity is US$0.585/SF, should the firm exercise the option? b What is the net US dollar receipt for the firm one period from now? c As a banker to the firm, what alternative courses of hedging actions would you initially suggest to the firm? d Under what circumstances is a course of action likely to be (i) the cheapest for the firm and (ii) also most profitable for your bank?

International Financial Management
International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 42QA
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10 A multinational firm buys a put option in anticipation of receiving SF1 million one period from now. Today, the one-period put is quoted US$0.01 per SF for an exercise price of US$0.60 (a contract is worth SF62,500). If the spot price at maturity is US$0.585/SF, should the firm exercise the option? a b What is the net US dollar receipt for the firm one period from now? c As a banker to the firm, what alternative courses of hedging actions would you initially suggest to the firm? d Under what circumstances is a course of action likely to be (i) the cheapest for the firm and (ii) also most profitable for your bank?
Transcribed Image Text:10 A multinational firm buys a put option in anticipation of receiving SF1 million one period from now. Today, the one-period put is quoted US$0.01 per SF for an exercise price of US$0.60 (a contract is worth SF62,500). If the spot price at maturity is US$0.585/SF, should the firm exercise the option? a b What is the net US dollar receipt for the firm one period from now? c As a banker to the firm, what alternative courses of hedging actions would you initially suggest to the firm? d Under what circumstances is a course of action likely to be (i) the cheapest for the firm and (ii) also most profitable for your bank?
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