GG Pearl Corp. is a large multinational firm. Over the next two months, the Company is...

GG Pearl Corp. is a large multinational firm. Over the next two months, the Company is expecting to have sales in Europe totaling 500,000,000 Euros, and is also expected to make purchases from vendors in Europe totaling 350,000,000 Euros. The Company is concerned about the volatility in the exchange rates of currencies in which it has transactions, so it has instituted a policy to mitigate exchange rate risk. GG Pearl's hedging policy is as follows: 50% of the net notional exposure in each currency pair shall be hedged using options and 50% of the net notional exposure in each currency pair shall be hedged using forward contracts. The current spot rate of the EUR/USD is quoted at 1.10. The strike price of put and call options are 1.10 and 1.105, respectively. The premium on both options is $.025. The two month forward rate exhibits a 1.5% discount from the current spot rate. Considering the projected flows in its EUR/USD currency pair over the next two months, what is the net financial outcome GG-Pearl would experience if the actual EUR/USD spot rate in two months was 1.06?

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I Hope my efforts will be fruitful to you....?

jeff jeffy answered 1 year ago

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