1. The Ceej Corporation expects to receive 1,000,000 Euros in one year (this is an

account receivable.) Ceej has the following information:

Spot rate on the Euro as of today is = $1.40

One year forward rate of the Euro is = $1.50

Interest rates are as follows:

Euro

U.S.

One year deposit rate

4.5%

6.0%

One year borrowing rate

5.0%

5.5%

A call option on Euro has an exercise price of $1.45 and a premium of $.03.

A put option on Euro has an exercise price of $1.45 and a premium of $.02.

Ceej Corporation forecasted the future spot rate as follows:

Possible outcome

Probability

$1.10

25%

$1.45

50%

$1.70

25%

a)

Evaluate a forward hedge. What is the advantage and disadvantage of this kind of

contract for Ceej Corporation.?

b)

Evaluate a money market hedge. What is the advantage and disadvantage of this

kind of contract for Ceej Corporation.?

c)

Evaluate and option hedge. What is the advantage and disadvantage of this kind

of contract for Ceej Corporation.?

d)

Evaluate remaining unhedged. What is the advantage and disadvantage of this

remaining unhedged for Ceej Corporation.?

E

Which alternative would you recommend and why?