Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price Premium Spot rate Expected spot rate in 30 days 30-day forward rate $.61 $.02 $.60 $.56 $.62

a. $610,000

b. $630,000

c. $590,000

d. $600,000

Total dollar amount received=$590,000

Option C is correct ($590,000)

Explanation:

Given dа ta:

Exercise Price=$0.61

Premium Price=$0.02

Spot Rate=$0.60

Expected spot rate in 30 days=$.56

30-day forward rate = $0.62

Required:

Total dollar amount received=?

Solution:

We have to account for premium:

Total dollar amount received = (Exercise Price-Premium Price) * SF1,000,000

Total dollar amount received = ($0.61-$0.02) * SF1,000,000

Total dollar amount received=$590,000

Option C is correct ($590,000)

C) $59000

Explanation:

We will use the 30 day forward rate to calculate the amount in dollars and also account for the premium and it is a put option we subtract the premium

Firstly subtract the premium and put uses the exercise price

$0.61-$0.02=$0.59

=SF1000000 * ($0.59)

=$590000