24. UCD (U.S. based MNC) willreceive500,000 euros in one year.Thespot exchange rate todayis $1.30 per euro. It observes that

1. Theone-year interest rate for eurosis 5%, and theone-year interest rate for U.S. dollarsis 2%.
2. In theoption market, there isone-year call option or put option available.Both options have the same exercise price of $1.28 per euro, and a premium of $0.02 per euro.
3. In theforward market, theone-year forward rateexhibits a2% discount from the current spot exchange rate.

How should UCD utilize theforward marketto hedge the exchange rate risk for its future receivables?And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.) (Points : 3.85)

Buya one-year forward contractfor the amount of 500,000 eurosat the forward rate of $1.30.One year later, UCD will fulfill its obligation and receives the amount of $650,000.

Sella one-year forward contractfor the amount of 500,000 eurosat the forward rate of $1.30. One year later, UCD will fulfill its obligation and receives the amount of $650,000.

Sella one-year forward contractfor the amount of 500,000 eurosat the forward rate of $1.274. One year later, UCD will fulfill its obligation and receives the amount of $637,000.

Buya one-year forward contractfor the amount of 500,000 eurosat the forward rate of $1.274. One year later, UCD will fulfill its obligation and receives the amount of $637,000.

25. Continued from Question 24, if UCD decides to use money market hedging strategy to hedge its receivables, how shall UCD implement the strategy? (Points : 3.85)

UCD should firstborrow U.S. dollars for the amount of 650,000.UCD will thengo to the foreign exchange market to exchange the amount borrowed into euros which yields UCD the amount of 500,000 euros. UCD willdeposit the amount exchanged at the bank in Europe.One year later,UCD will pay off its U.S. dollar loan by using the euro payments received.

UCD should firstborrow euros for the amount of 476,190.48 euros.UCD will thengo to the foreign exchange market to exchange the amount borrowed into U.S. dollars which yields UCD the amount of $619,047.42. UCD willdeposit the amount exchanged at the bank in the U.S..One year later, UCD will pay off its euro loanusing the euro payments received.

UCD shouldfirst borrow eurosfor the amount of 500,000 euros.UCD will thengo to the foreign exchange market to exchange the amount borrowed into U.S. dollars which yields UCD the amount of $650,000. UCD willdeposit the amount exchanged at the bank in the U.S..One year later, UCD will pay off its euro loan using the euro payments received.

UCD should firstborrow U.S. dollars for the amount of 476,190.48.UCD will thengo to the foreign exchange market to exchange the amount borrowed into euros which yields UCD the amount of 500,000 euros. UCD willdeposit the amount exchanged at the bank in Europe.One year later, UCD will pay off its U.S. dollar loanby using the euro payments received.

26. Continued from Question 25, how many U.S. dollars will UCD end up receiving for its 500,000 euro receivable by using money market hedge? (Points : 3.85)

$650,000.00

$637,000.00

$669,117.65

$631,428.57

Question 27. 27. Continued from Question 24, if UCD decides to use options contracts

Sell one-year put options of 500,000 euros with the exercise price $1.28 per euro.

Buy one-year put options of 500,000 euros with the exercise price $1.28 per euro.

Buy one-year call options of 500,000 euros with the exercise price $1.28 per euro.