Milton Mining is a U.S. multinational that just purchased €1,100,000 of goods on account, due in 30 days from a German supplier. The spot exchange rate is $1.225/€. Milton wants to hedge the account payable with an OTC call option with a strike price of $1.250/€. The option premium is 0.50 percent. What is the U.S. dollar cost of the option?
A) $5,500.00
B) $6,442.36
C) $6,737.50
D) $6,777.93
E) $6,850.00

Question

Quizplus · Accepted Answer

The U.S. dollar cost of the option is calculated by multiplying the option premium (0.50%) by the notional amount in dollars (€1,100,000 * $1.250/€), which equals $6,737.50.

Milton Mining Is a U