What is the lower bound of an American call option with 14 months to expiry and a strike price of 1. The underlying stock is currently trading at 2.5, and the risk-free rate is 8%. Do not enter the dollar sign "$". Your answer should have at least two decimal places.

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A. Answers to 1) - 3) are based on the following information TEL is based in Toronto, Ontario. It imports furniture from Europe and sells it to furniture dealers throughout North America. It has a December 31 fiscal year end. On November 1, 2019, TEL entered to a non-binding contract to sell furniture to a customer in the United States for $500,000 USD. The furniture was delivered on December 25, 2019. Under the terms of the contract, payment was due on January 31, 2020. On November 30, 2019, TEL hedged the transaction by entering into a forward contract to sell $500,000 USD to its bank on January 31, 2020 at a rate of $1USD = $1.20 CAN. Exchange rates were as follows: January 1, 2019 November 1, 2019 November 30, 2019 December 25, 2019 December 31, 2019 January 31, 2020 Assume: net amount method is used Spot rate 1.0 1.2 1.3 1.5 1.4 1.3 $1 USD CAN$ Forward rate .99 1.3 1.2 1.3 1.1 1.4 1) Is hedge accounting necessary? why and why not? 2) What are the fair values of the hedged item and hedging item on Dec 31, 2019? 3) Evaluate the effectiveness of the hedge on the settlement day (January 31, 2020) using supportive numbers. A. Answers to 1) - 3) are based on the following information TEL is based in Toronto, Ontario. It imports furniture from Europe and sells it to furniture dealers throughout North America. It has a December 31 fiscal year end. On November 1, 2019, TEL entered to a non-binding contract to sell furniture to a customer in the United States for $500,000 USD. The furniture was delivered on December 25, 2019. Under the terms of the contract, payment was due on January 31, 2020. On November 30, 2019, TEL hedged the transaction by entering into a forward contract to sell $500,000 USD to its bank on January 31, 2020 at a rate of $1USD = $1.20 CAN. Exchange rates were as follows: January 1, 2019 November 1, 2019 November 30, 2019 December 25, 2019 December 31, 2019 January 31, 2020 Assume: net amount method is used Spot rate 1.0 1.2 1.3 1.5 1.4 1.3 $1 USD CAN$ Forward rate .99 1.3 1.2 1.3 1.1 1.4 1) Is hedge accounting necessary? why and why not? 2) What are the fair values of the hedged item and hedging item on Dec 31, 2019? 3) Evaluate the effectiveness of the hedge on the settlement day (January 31, 2020) using supportive numbers.

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