Suppose General Electric (GE) is bidding on a hydroelectric dam project in Canada. If the bid is
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Question:
Suppose General Electric (GE) is bidding on a hydroelectric dam project in Canada. If the bid is accepted, which will be known in three months, GE is going to receive C$100m to initiate the project. GE receives and pays nothing if its bid turns out to be rejected. GE chooses to buy a three-month put option on C$100m with the strike price of US$1/C$ to hedge the contingent exposure, and he pays the total option premium of US$2m. Suppose the current exchange rate is US$1 for C$1.
Compute GE's net profit (or losses) of its hedged position relative to the current exchange rate for the following two scenarios. Quote your answers in terms of US$.
Related Book For
Financial Accounting An Integrated Statements Approach
ISBN: 978-0324312119
2nd Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren
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