Kansas Corp., an American company, has a payment of €6.2 million due to Tuscany Corp. one...

Kansas Corp., an American company, has a payment of €6.2 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $6,888,889, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €6.2 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $112,000 for a one-year call option on €6.2 million at an exchange rate of 0.88 €/$.

a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

Strategy 1:_____

Strategy 2:______

b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

Strategy 1:________

Strategy 2:________

Expert Solution

jeff jeffy answered 3 months ago

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