Question
United Electric (UE) expects to receive 500,000 euros (EUR) from its customer on Sep. 1, 2040, three months from now. UE wishes to sell EUR
United Electric (UE) expects to receive 500,000 euros (EUR) from its customer on Sep. 1, 2040, three months from now. UE wishes to sell EUR 500,000 at a rate of $1.200 or higher. To hedge its foreign exchange exposure, UE is considering using currency options. The table below summarizes spot prices and the option premiums for September put option observed on June 1 and Sep. 1:
June 1st | Sep. 1st | |
EUR spot price | $1.220 | 1.110 |
Option premium for EUR put with a strike price $1.200 | $0.012 | 0.096 |
Suppose UE exercises the put option (rather than sell-closes its option position) on Sep. 1. What will be the (i) net gain or loss taking into account the change in the receivable and the cost of option premium paid? Additionally, (ii) compute the gain or loss associated with the change in EUR spot price between June 1 and Sep. 1 if the firm had not purchased the put option.
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