Question13 A French MNC purchased 90-day currency put options to hedge a 250,000 Australian dollar (AUD) receivable due to be paid by their customer in 90 days’ time. Each contract size is AUD125,000. The MNC paid a premium of EUR0.0136 per options contract to purchase the options with an exercise price of EUR0.818. At the time the options were purchased, the 90-day money market interest rates were 4.67% p.a. and 6.58% p.a. for the AUD and EUR respectively.Assume that the spot rate at the time of the options expiry is EUR0.838/AUD. Suppose that the MNC borrowed in their domestic currency in order to fund the option premiums. What is the net amount received (rounded to the nearest whole number) by the company if it acts both rationally and optimally? Use 360 days in a year where necessary. EUR197,588 EUR202,610 None of the options in this question. EUR197,610 EUR206,044 ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

To tackle this problem, I’ll lay out the cash flows step by step and then assess each answer choice against those flows.
First, identify the hedge and position: the MNC buys 90-day currency put options on AUD to hedge a 250,000 AUD receivable. Contract size is 125,000 AUD, so the number of contracts needed is 250,000 / 125,000 = 2 contracts. The premium is EUR0.0136 per options contract, and each contract covers 125,000 AUD, so the total premium in EUR is 2 × 125,000 × 0.0136 = EUR 3,400.
Next, the option payoff at expiry depends on the spot EUR/AUD. A put on AUD gives the right to sell AUD for EUR at the strike of EUR0.818 per AUD. If the expiry spot is EUR0.838/AUD, then the payoff per AUD is max(strike − spot, 0) = max(0.818 − 0.838, 0) = 0. So the put expires worthless in this scenario. Consequently, there is no payoff from exercising the put.
Because the premium is funded by borrowing in EUR, we must account for the interest on the EUR loan over 90 days. Using a 360-day year, interest factor = 1 + (0.0658 × 90/360) = 1 + 0.01645 = 1.01645. The repayment amount for the premium is EUR 3,400 × 1.01645 ≈ EUR 3,455.93.
Now consider the actual AUD receivable conversion at expiry. If the company simply converts the 250,000 AUD at the expiry spot rate of EUR0.838/AUD, it would receive 250,000 × 0.838 = EUR 209,500. Since the put expired worthless, there is no additional cash flow from the option itself beyond the saved premium (which is already reflected in the loan repayment). Therefore, the net EUR cash inflow (or net amount received) after funding the premium is approximately EUR 209,500 − EUR 3,455.93 ≈ EUR 206,044.07, which rounds to EUR 206,044.
Now, evaluate each answer option in turn.
Option 1: EUR 197,588. This would require a larger deduction from the gross EUR 209,500 than the computed premium financing and interest allow, or a different spot outcome. Since the spot used is 0.838 and the put payoff is zero, the only deductions are the premium financing cost (EUR 3,400 principal plus interest EUR 55.93, totaling EUR 3,455.93). 209,500 − 3,455.93 equals 206,044.07, not 197,588. Thus this choice seems too small given the inputs.
Option 2: EUR 202,610. To reach 202,610 from 209,500, the total deductions would need to amount to 6,890. However, the premium is EUR 3,400 and interest on that premium is about EUR 55.93, for a total of EUR 3,455.93 in deductions, far short of 6,890. So this value does not align with the calculated cash flows under the stated assumptions.
Option 3: None of the options in this question. Since a concrete numerical outcome can be computed from the given data (about EUR 206,044 after rounding) and there is a listed option matching that ballpark, this choice would be incorrect if we accept the calculated result. However, we must be careful: the exercise payoff is zero and the premium cost is as calculated; the computed net is not 197k or 202k, but 206k, so depending on the exam’s intended interpretation this could be a distractor.
Option 4: EUR 197,610. Similar to Option 1, this requires a larger deduction than the straightforward premium plus interest would cause. The net 206,044 is notably higher than 197,610, so this option misaligns with the calculated cash flows.
Option 5: EUR 206,044. This matches the arithmetic from the described flows: gross EUR 209,500 from converting 250,000 AUD at spot 0.838, minus the premium financing for 2 contracts (EUR 3,400) and its interest (EUR 3,455.93 total repayment), giving 209,500 − 3,455.93 ≈ 206,044.07, rounded to EUR 206,044. This aligns with the step-by-step calculation above.
In summary, option-by-option reasoning shows that options 1, 2, 3, and 4 diverge from the actual cash-flow outcome under the given assumptions, while option 5 matches the computed net amount using the stated premium, number of contracts, spot at expiry, and financing terms.

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