You are the treasurer of Arizona Corporation and must decide how to hedge (if at
ID: 2783872 • Letter: Y
Question
You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:
Future Spot Rate
Probability
$.46
20%
$.48
30%
$.52
50%
The 90-day forward rate of the Australian dollar is $.50.
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
0%.
80%.
50%.
none of the above
Future Spot Rate
Probability
$.46
20%
$.48
30%
$.52
50%
Explanation / Answer
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
Arizona will exercise when the exercise price is greater than the future spot price (20% + 30% =50%). Therefore the correct answer is option C- 50%.
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