Question

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 totalamount 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

Answer 1

Answer:

d. $6,500,000 dollars

Explanation:

Hedging is a strategy used by investment firms that want to minimize the risk of loosing their investments, so what they basically do is giving up the actions and investments and get some money in return, the exercise price is what they will pay you for your total investment, and the premium fee is somthing you have to pay to hedge an investment:

So you multiply the 12.5 million by .55 which is the amount you´ll receive, and withdraw form that the premium:

12,500,000x.55=$6,875,000

12,500,000x.03=$375,000

$6.875,000-$375,000= $6,500,000

The firm will receive $6,500,000 dollars.