QUESTION 19

1. Use the information for following problem(s).

   Firm AAA is located in the U.S.. It has purchase from a Germany firm 1,000,000 worth of product. The payable will be processed a year later. Refer to the following for details.

   The current spot exchange rate is $1.40/euro

   The one year forward rate is $1.30/euro

   The Euro zone annual interest rate = 2%

   The U.S. annual interest rate = 3%

   Call options for euro has a strike price $1.38, premium price is $0.02

   Question: The call options for euro has a strike price $1.38, premium price is $0.02. If firm AAA chooses to hedge its transaction exposure using call option, the required amount in dollars to pay off the accounts payable in a year will be ________.

   		$1,380,000
   		$1,400,000
   		None of the above
   		$1,420,000