Question

The background information and instruction of the question is provided below, and i only asked for solving the table 4 and table 5, thank you

Scenario 2:

Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from France, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in France informed you that the current cost of the wine that you want to import is €2,500,000. The wine in France can be shipped to the United States immediately but you have three months to conduct payment.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Britain. The payment of £2,500,000 for the export to Britain will be received twelve months from now.

You consider different transaction hedges, namely forwards, options and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Currencies	Spot	3 month (90 days)	6 month (180 days)	9 month (270 days)	12 month (360 days)
$/£	1.30009	1.30611	1.31217	1.31825	1.32436
$/€	1.14134	1.14743	1.15354	1.15969	1.16587

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Country	3 month rates		6 months rates		9 month rates		12 month rates
	Borrow	Invest	Borrow	Invest	Borrow	Invest	Borrow	Invest
United States	2.687%	2.554%	2.713%	2.580%	2.740%	2.607%	2.766%	2.633%
Britain	0.786%	0.747%	0.794%	0.755%	0.801%	0.762%	0.809%	0.770%
Europe	0.505%	0.480%	0.510%	0.485%	0.515%	0.490%	0.520%	0.495%

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Currencies	3 month options				6 month options
	Call option		Put option		Call option		Put option
	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $
$/£	$1.29962	$0.00383	$1.31268	$0.00383	$1.30564	$0.00381	$1.31876	$0.00381
$/€	$1.14400	$0.00174	$1.15088	$0.00174	$1.15009	$0.00173	$1.15702	$0.00152

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

Please solve only table 4 and table 5

Table 4: France import cost with option hedge:

	Type of option (Call or put?)	Total premium cost for import	Total cost of option in $ (Strike plus premium)	Option hedge breakeven exchange rate
Show answers in this row:
Show your workings in the columns below the answers		$ premium x total Euro value of import x (1+i/n)	(Strike price x total Euro value of import) + total premium	Total cost of option in $/ Total Euro value of transaction

Table 5: France: Exchange rate hedges compared:

	Forward rate	Money market hedge locked in exchange rate	Option hedge breakeven exchange rate
$/€

Which hedging technique should be applied? ________________________________

Answer 1

Table 4:

	Type of option (Call or put?)	Total premium cost for import	Total cost of option in $ (Strike plus premium)	Option hedge breakeven exchange rate
Show answers in this row:	Call	4379.22	2864379.22	1.1457
		0.00174*2.5*(1+2.687%/4)*10^6	1.144*2.5*10^6+4379.22	1.145751688
Show your workings in the columns below the answers		$ premium x total Euro value of import x (1+i/n)	(Strike price x total Euro value of import) + total premium	Total cost of option in $/ Total Euro value of transaction

Table 5:

	Forward rate	Money market hedge locked in exchange rate	Option hedge breakeven exchange rate
$/€	1.147134	1.218009	1.145752

forward rate for 3 months is given above.

Money market hedge can be done as follows:

Borrow $ to convert in present value of euros (2500000/(1+0.0048/4))

Required $ = Euros req*spot rate

Invest euros at 0.0048% in europe

Realize euros and pay the obligation.

Total $ finally to be paid divide by 2.5 Mn will give you 1.218009