On December 1, 2011, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date : December 1, 2011 Spot Rate : $.97 Option Premium : $.05

Date : December 31, 2011 : Spot Rate : $.95 Option Premium : $.04

Date : February 1, 2012 Spot Rate : $.94 Option Premium : $.03

Question :

Compute the fair value of the foreign currency option at December 1, 2011. A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500.

Please show detailed help with steps how $7,500 is calculated