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Given its experience, Garnier Corporation expects that it will sell goods to a foreign customer at a

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Given its experience, Garnier Corporation expects that it will sell goods to a foreign customer at a price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month put option to sell 1 million lire is acquired on December 15, Year 1. Garnier selects a strike price of $0.15 per lire, paying a premium of $0.005 per unit, when the spot rate is $0.15. The spot rate decreases to $0.14 at December 31, Year 1, causing the fair value of the option to increase to $12,000. By March 15, Year 2, when the goods are delivered and payment is received from the customer, the spot rate has fallen to $0.13, resulting in a fair value for the option of $20,000.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Garnier Corporation Option Cash Flow Hedge of Forecasted Transaction 1215Y1 Foreign currency option 5000 Cash 1 million lire x 005 5000 No journal ent...View the full answer


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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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