Choice "B" is correct. Hedgehog will not exercise its option and will instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. Because the premium is a sunk cost, it is not involved in the decision whether to exercise the option (true sunk costs are never involved in decisions about the future because nothing in the future can change them). Hedgehog has a receivable in LCU. It will receive 500,000 LCU on the settlement date and can turn right around and sell the LCU on the open market for $315,000 [$0.63 × 500,000]. If it exercises the option, it can sell the same 500,000 LCU for $305,000 [$0.61 × 500,000]. Obviously, it would not exercise the option. However, if the spot rate on the settlement date had been $0.60, it would have exercised the option because the option would allow it to sell the 500,000 LCU for $0.61.

Either way, the premium for the option is a sunk cost and is not relevant to the decision on whether to exercise the option. However, it is relevant to determining the total gain or loss on the transaction, and this is illustrated below:

Choices "a", "c", and "d" are incorrect, per computation above.