The DKNY Corporation owes Mex$ 7 million due for payment to the Mexican supplier
ID: 2758569 • Letter: T
Question
The DKNY Corporation owes Mex$ 7 million due for payment to the Mexican supplier in 30 days. The current spot-rate is Mex$ 13.00/USD. DKNY has decided to to hedge the Mexican peso exposure by the use of a put-option on USD orcurrency collar (range forward) contract with CitiBank as counterparty. Currently, a 30-day put-option on USD at exercise rate 12.9 (Mex$ 12.9/USD) trades at a 1% premium, while a 30-day call-option on USD at exercise rate 13.1 (Mex$ 13.1/USD) trades at a 3% premium.
What is the net premium paid or received on the currency collar contract? State your answer to the nearest USD (e.g. 5,673 or 12,345)!
Explanation / Answer
To hedge the exposure using currency collar DKNY corporation will need to buy a USD put Mex$ call with strike $12.90 and sell a USD call Mex$ Put with strike $13.10
Assume that premium on the above options is quoted in percentage USD terms .
Cost of buy Put = (7 million/12.9)*1%=5426.36 usd
Income on selling call = (7 million/13.1)*3% =16030.53 usd
Net Income =5426.36-16030.53= $10604.2
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