Reference no: EM131177552

"In 2011, Heineken Breweries, a Dutch brewing company (from the Netherlands), decided to purchase a manufacturing facility in Canada to take advantage of the nation s bountiful rice harvests. Molson breweries, a Canadian brewing company, was willing to sell Heineken a manufacturing facility for 10 million Canadian dollars and Heineken accepted Molson s offer. The currency of Canada is the Canadian dollar (CDN) and the currency of the Netherlands is the Euro (EUR). After buying the manufacturing facility from Molson, Heineken starts planning to produce its beer. Wanting to repatriate its profits after Heineken sells its beer to Canadian customers, Heineken buys an option contract to cover its substantial expected profits from RBC Bank, a Canadian bank. The option sets the exchange rate at 1 Euro to 1.8 CDN. When the option comes to the end of its term, the market exchange rate is 1 Euro to 1.5 CDN. Heineken repatriates its profits back to the Netherlands by exchanging CDN for Euro at this time. Which of the following best describes the outcome of the option contract that Heineken signed with RBC Bank?"

• Heineken benefitted from the option contract because it experienced an adverse exchange rate fluctuation over the term of the contract
• Heineken lost a substantial sum by entering into the option contract because it will be forced to exchange currency at a disadvantageous rate when compared to the market rate
• Heineken only lost the premium that it paid to RBC Bank because it will choose not to exercise the option contract at expiration
• Heineken only gained the premium that RBC Bank paid because RBC will choose not to exercise the option contract at expiration