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Suppose General Electric (GE) is bidding on a hydroelectric dam project in Canada. If the bid is accepted, which will be known in three months,
Suppose General Electric (GE) is bidding on a hydroelectric dam project in Canada. If the bid is accepted, which will be known in three months, GE is going to receive C$100m to initiate the project. GE receives and pays nothing if its bid turns out to be rejected. GE chooses to buy a three-month put option on C$100m with the strike price of US$1/C$ to hedge the contingent exposure, and he pays the total option premium of US$2m. Suppose the current exchange rate is US$1 for C$1. Compute GEs net profit (or losses) of its hedged position relative to the current exchange rate for the following two scenarios. Quote your answers in terms of US$. a) The bid is accepted, and the exchange rate three months later turns out to be US$1.1/C$ b) The bid is rejected, and the exchange rate three months later turns out to be US$0.8/C$4
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