3. Firestone’s euro exposure (intermediate). On July 1, 2014, the Dutch subsidiary of Firestone Company–USA has a projected net translation exposure of €50,000,000 for July 1, 2015. Because of the euro-zone’s buoyant balance of trade and a relatively low rate of inflation, the euro is widely expected to revalue by 4 percent to 6 percent vis-à-vis the U.S. dollar during the next 12 months.

a. Should the international treasurer of Firestone hedge its net exposure in euros?

b. The prevailing dollar price of one euro is €1 = $1.32, and one-year forward contracts for euros sell at a 1.5 percent premium. Show how Firestone could hedge its € exposure.

c. At-the-money € put options are also available at a 1.75 percent premium.

Would you advise Firestone to use currency options to hedge its € exposure?