Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. suppose that mullen co, a u.s. based mnc, knows th

Suppose that Mullen Co, a U.S. based MNC, knows that it will need 200,000 pounds...

90.2K

Verified Solution

Question

Accounting

Suppose that Mullen Co, a U.S. based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a forward call option to hedge these payables. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.03.

Mullen Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now. The company believes there are three possible outcomes for the spot rate for the pound in one year. These three scenarios are shown in the following table:

Scenario

Probability

Pound Spot Rate in 1 Year

Option Premium

Total Price Per Unit, with Premium

Total Price Paid for 200,000 Pounds

Exercise Options?
1 25.00% $1.16 $0.03 $1.19 $238,000 no
2 50.00% $1.22 $0.03 $1.23 $246,000 yes
3 25.00% $1.24 $0.03 $1.23 $246,000 yes

1

Given the information in the table, the expected value of dollar cash outflows when hedging payables with currency call options is

BLANK for all 200,000 pounds.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students