Kansas Corp., an American company, has a payment of €6.1 million due to Tuscany Corp. one...

Kansas Corp., an American company, has a payment of €6.1 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 €/$, this would cost Kansas $6,777,778, but Kansas faces the risk that the €/$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy €6.1 million forward today at a one-year forward rate of 0.89 €/$. Strategy 2 is to pay a premium of $111,000 for a one-year call option on €6.1 million at an exchange rate of 0.88 €/$.

a. Suppose that in one year the spot exchange rate is 0.85 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

b. Suppose that in one year the spot exchange rate is 0.95 €/$. What would be Kansas’s net dollar cost for the payable under each strategy? (Round your answer to the nearest whole dollar amount.)

Expert Solution

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jeff jeffy answered 1 year ago

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