Question: On December 1, 2011, Keenan Company, a U.S. firm, ...

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. D. $7,500. I understand how to derive the 7500 but, what does this mean in english? Does it mean that by placing a put option the seller is protecting himself from falling prices and in this case the seller is guaranteed the .97due to the put but, because the market prevails at .05 higher he can now take advantage and must recognize a foreign currency gain? Please explain in as simple terms as possible. Thanks