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Question12 An Australian company purchased currency put option to hedge a 300,000 Chinese Yuan (CNY) receivable. The exercise price of the option is AUD0.200/CNY with a premium of AUD0.010/CNY. The spot rate became AUD0.195/CNY at the time of maturity. Which of the following statements is true? a. The Australian company will not exercise the option, granting a net cash flow of AUD 58,500. b. The Australian company will end up with AUD 57,000 net cash flow by exercising the option. c. The Australian company will end up with AUD 60,000 net cash flow by exercising the option. d. The Australian company will not exercise the option, granting a net cash flow of AUD 55,500. ResetMaximum marks: 1 Flag question undefined
Options
A.a. The Australian company will not exercise the option, granting a net cash flow of AUD 58,500.
B.b. The Australian company will end up with AUD 57,000 net cash flow by exercising the option.
C.c. The Australian company will end up with AUD 60,000 net cash flow by exercising the option.
D.d. The Australian company will not exercise the option, granting a net cash flow of AUD 55,500.
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Step-by-Step Analysis
We start by restating the scenario to ensure understanding: An Australian company hedges a 300,000 CNY receivable by purchasing a currency put option with a strike price of AUD 0.200 per CNY, paying a premium of AUD 0.010 per CNY. At maturity, the spot rate is AUD 0.195 per CNY.
Option by option analysis:
Option a: The company will not exercise the option, granting a net cash flow of AUD 58,500.
- If the company does not exercise, it simply converts the 300,000 CNY at the spot rate: 300,000 × 0.195 = AUD 58,500. Premium cost is irrelevant for this cash flow calculation since it only a......Login to view full explanationLog in for full answers
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