12. You are working in the international division of an American dollar-based multinational and have been asked to hedge a receivable of 1 million euros, due in six months, on a date that happens to coincide with the expiration date of option contracts on the euro. You have collected the following information and are considering two different plans for this hedge: USD EUR spot 1.42 USD/EUR six-month forward 1.40 Euro put, strike = $1.38, premium = $0.04, expiration in six months You want to graph the S value per euro exposure of your hedged position as a function of the spot rate in six months, in other words, your vertical axis should be the dollar receivable PER ONE EURO in your position and the horizontal axis should be the future spot rate. Always include the original receivable and make sure to label your axis and all relevant points. a) First graph the put option hedging plan. Under what range of exchange rates the put option plan is better than being unhedged? For this range, indicate whether the put option is in-the-money, at-the- money or out-of-the-money and explain where the advantage is in using the option. b) Now consider the two alternative hedging plans: i. the forward hedging plan ii. the put option hedging plan For what range of exchange rates does the option plan prove better than the forward plan? For what range of exchange rates does the forward plan prove better than the option plan? For each of these ranges, indicate whether the put option is in-the-money, at-the-money or out-of-the-money. c) If the exchange rate in six months turns out to be equal to 1.45, what would be the $ value per 12. You are working in the international division of an American dollar-based multinational and have been asked to hedge a receivable of 1 million euros, due in six months, on a date that happens to coincide with the expiration date of option contracts on the euro. You have collected the following information and are considering two different plans for this hedge: USD EUR spot 1.42 USD/EUR six-month forward 1.40 Euro put, strike = $1.38, premium = $0.04, expiration in six months You want to graph the S value per euro exposure of your hedged position as a function of the spot rate in six months, in other words, your vertical axis should be the dollar receivable PER ONE EURO in your position and the horizontal axis should be the future spot rate. Always include the original receivable and make sure to label your axis and all relevant points. a) First graph the put option hedging plan. Under what range of exchange rates the put option plan is better than being unhedged? For this range, indicate whether the put option is in-the-money, at-the- money or out-of-the-money and explain where the advantage is in using the option. b) Now consider the two alternative hedging plans: i. the forward hedging plan ii. the put option hedging plan For what range of exchange rates does the option plan prove better than the forward plan? For what range of exchange rates does the forward plan prove better than the option plan? For each of these ranges, indicate whether the put option is in-the-money, at-the-money or out-of-the-money. c) If the exchange rate in six months turns out to be equal to 1.45, what would be the $ value per