In: Finance
Disney is expecting to receive 250,000 Euro in one year. Disney expects the spot rate of euro to be $1.29 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the euro is quoted at $1.31. The strike price of put and call options are $1.34 and $1.33 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 3.5% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy? a. buy a put option and receive $327,500. b. sell euros forward and receive $338,962.5 c. sell a call option and receive $336,375 d. sell a put option and receive $338,962.5. why choose b