Strike price will not reduce the net cash flow to the firm

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Reference no: EM131314374

A US firm has Euro receivables of E100,100,000 from Germany in six months. It decides to use options to hedge the receivables. Put options with exercise price $1.60 and premium $0.04 are available.

Suppose the firm fully hedges it’s receivables (that is a fall in the value of euro below the strike price will not reduce the net cash flow to the firm).

The spot rate in six months is E1 for $1.40. What will be the net amount the firm will receive from the put options (put payoff minus premium)?

Reference no: EM131314374

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