Disney is expecting to receive 250,000 Euro in one year. Disney expects the spot rate of...

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

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Expert Solution

REMEMBER : WHEN YOU HAVE RECEIVABLES, YOU WILL ALWAYS BUY PUT OPTIONS.

jeff jeffy answered 1 year ago

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