Question

ABC Corporation has 90-day receivables of Euro 500,000. The following information is available

Spot rate of the Euro: $ 1.20 per Euro

90-day Forward Rate: $ $1.15 per Euro

90-day Interest rates are as follows:

US Euro

90-day deposit rate 2.0 % 2.0 %

90-day borrowing rate 3.0 % 3.0 %

A call option on Euro that expires in 90-days has an exercise price of $1.20 and has a premium of $ 0.03. A put option on Euro that expires in 90-days has an exercise price of $1.20 and has a premium of $0.02

The Euro spot rate in 90-days is forecasted to be:

Possible Rate Probability

$1.15 30 %

$1.10 70 %

ABC Corporation is considering:

a) A forward hedge

b) A money market hedge

c) An option hedge and

d) Remaining un-hedged

You have been hired as a consultant to decide on the best possible hedge. Which one of the alternatives you will recommend, and why?

Answer 1