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  • Exercise Answers - Option Contracts

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    John Philip L Concepcion
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    A foreign currency option gives the holder the right but not the obligation to buy or sell a foreign currency at a predetermined exchange rate in the future. The document discusses a company, Keenan, that sold goods to a Spanish company for 150,000 euro. Keenan entered into a forward exchange contract to deliver the euro on a future date and used a foreign currency option as a hedge. The summary provides context about foreign currency options and Keenan's transaction involving options.

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    A foreign currency option gives the holder the right but not the obligation to buy or sell a foreign currency at a predetermined exchange rate in the future. The document discusses a company, Keenan, that sold goods to a Spanish company for 150,000 euro. Keenan entered into a forward exchange contract to deliver the euro on a future date and used a foreign currency option as a hedge. The summary provides context about foreign currency options and Keenan's transaction involving options.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    92 views1 page

    Exercise Answers - Option Contracts

    Uploaded by

    John Philip L Concepcion
    A foreign currency option gives the holder the right but not the obligation to buy or sell a foreign currency at a predetermined exchange rate in the future. The document discusses a company, Keenan, that sold goods to a Spanish company for 150,000 euro. Keenan entered into a forward exchange contract to deliver the euro on a future date and used a foreign currency option as a hedge. The summary provides context about foreign currency options and Keenan's transaction involving options.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Which statement is true regarding a foreign currency option?

    A foreign currency option gives the holder the right but not the obligation  to buy or sell foreign
    currency in the future.

    On December 1, 2018, Keenan Company sold merchandise to Velez Company of


    Spain for 150,000 euro. Payment is due on February 1, 2008.  Keenan entered into
    a forward exchange contract on December 1, 2018, to deliver 150,000 euro on
    February 1, 2008 for 0.97.  Keenan chose to use a foreign currency option to hedge
    this foreign currency asset designated as a cash flow hedge.  Relevant exchange
    rates follow:
      Spot Rate Option
    Premium
    December 1, 2018 0.97 0.05
    December 31, 0.95 0.04
    2018
    February 1, 2008 0.94 0.03
     
    Compute the value of the foreign currency option at December 1, 2018. 

    7,500.

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