18. TEK-Italian Account Receivable (Spreadsheet on Web Site) TEK wishes to hedge a $4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment is due in three months. TEK's Italian unit does not have ready access to local cur- rency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the fol- lowing quotes:

a. What are the costs of each alternative?

b. What are the risks of each alternative?

c. Which alternative should TEK choose if it prefers to "play it safe"?

d. Which alternative should TEK choose if it is will- ing to take a reasonable risk and has a directional view that the euro may be appreciating versus the dollar during the next three months?

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Spot rate: Three-month forward rates Three-month euro interest rate: Three month put option on euros at strike price of $1,0800/ TEK's weighted average cost of capital: $1.2000/ $1.2180/ 4.200% per year 3.40% 9.80%