Question 1

A U.S. company has a receivable of 100,000 Euros (€) due in 90 days. The current spot rate is $1.10/€. The company is concerned the Euro will depreciate. To hedge this risk, the company purchases a put option on 100,000 Euros with a strike price of $1.10/€. The premium paid is $2,000. If the spot rate in 90 days is $1.05/€, what is the net cash flow from the transaction (Receivable + Option)?

Accepted Answer

1. Calculate value of receivable at new rate. 2. Calculate payoff of option (Strike - Spot). 3. Subtract option premium.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to subtract the premium; calculating option payoff incorrectly.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 5

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