ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Suppose you have a 1,200,000 US dollar payable
coming due in June and that the spot today is.98
US/CDN. You get a strike of .98 US and you are
dealing with the PHLX. Suppose you are deciding
whether or not to hedge out the foreign
exchange risk. The size of the Canadian dollar
contract on the PHLX is 50,000 Canadian dollars
per contract. The option price is listed as 1.00 for
the June put on Canadian dollars and .90 on the
June call. Suppose you expect the US/CDN to be
.97 on the last day of the option (the expiry date).
This also happens to be the day you need to
cover your payable. How much does it cost you
to set up the hedge with brokerage cost set to
zero? (In CANADIAN dollars approximately.) O A.
12,000 O B. 12,887 O C. 12,755 O D. 12,500
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Transcribed Image Text:Suppose you have a 1,200,000 US dollar payable coming due in June and that the spot today is.98 US/CDN. You get a strike of .98 US and you are dealing with the PHLX. Suppose you are deciding whether or not to hedge out the foreign exchange risk. The size of the Canadian dollar contract on the PHLX is 50,000 Canadian dollars per contract. The option price is listed as 1.00 for the June put on Canadian dollars and .90 on the June call. Suppose you expect the US/CDN to be .97 on the last day of the option (the expiry date). This also happens to be the day you need to cover your payable. How much does it cost you to set up the hedge with brokerage cost set to zero? (In CANADIAN dollars approximately.) O A. 12,000 O B. 12,887 O C. 12,755 O D. 12,500
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