Frank Jones, owner of the Crumble Rocks Inc., will be receiving about 15,000 Cayman Islands dollars about one month from now as payments for exports. Frank is concerned about his exposure as he believes that there are two possible scenarios (1) The Caymanian dollar would depreciate by 4% over next month (2) The Caymanian dollar will appreciate by 3% next month. Frank notices that the prevailing spot rate of the Caymanian dollar is $1.20- and one-month forward rate is $1.16. Frank can purchase a put option that has exercise price of $1.16 and a premium of $.03.

Determine the amount of dollars received (under both the scenarios) by the company if receivables are not hedged.
Determine the amount of dollars received by the Crumble Rock Inc. if a put option is used to hedge receivables in one month under each of the two exchange rate scenarios.
Determine the amount received if forward hedge is used.

Answer rating: 100% (QA)

Without hedging if the Caymanian dollar depreciates by 4 Frank would receive 15000 120 CI12500 CI125... View the full answer