A US multinational is expecting a payment from Cayman Islands in one year. The amount is KYD 1,000,000 in Cayman Island dollars.
a. The expected spot prices to prevail at the end of the year range from $1.14 to $1.26. The following information is available:
1.       Spot rate	$1.20/KYD
2.       6-month forward rate	$1.15/KYD
3.       Interest rate in US	2.00%
4.       Interest rate Cayman Islands	9.00%
5.       Call option premium	$0.12	per US dollar	E=$1.20
Put Option premium	$0.14	per US dollar	E=$1.20
Premium is to be based on foreign currency expressed in US dollars.
Show how the company can hedge using the forward hedge, money market hedge and options hedge. Which hedge would you recommend?
b.
A company has bid for a large project in Germany. The results will be announced in 3 months.
If it wins the contract, it is expected to make a performance payment of $50 million to the German government. The spot rate for the Euro is $0.80/€.
1. Should the company be worried about the dollar appreciating or depreciating?
2. How can the company hedge the payment using options?
3. Show the expected payoffs if the Euro is $0.90/€ and $0.70/€ at the end of the three months. Ignore premiums.