8.

BHP Billiton just signed a deal with a German company. Under the term of the contract, BHP will sell 1 million pounds of copper in one year for 700,000 euros. The copper production cost is $0.9 per pound.

Suppose the spot exchange rate in one year is $1.54/euro, the one-year forward rate is $1.70/euro and the one-year put option to sell euros at a strike price of $1.63/euro is trading for $0.06/euro.

Which of the following statements is MOST CORRECT?

a.

The unhedged profit of BHP is $178,000 while the option hedge profit is $199,000.

b.

The unhedged profit of BHP is $178,000 while the option hedge profit is $290,000.

c.

The unhedged profit of BHP is $290,000 while the option hedge profit is $241,000.

d.

The unhedged profit of BHP is $241,000 while the option hedge profit is $199,000.