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A US multinational received an order for airplane parts from Australia for delivery in one year. The total invoice is A$1,000,000 and payable in six
A US multinational received an order for airplane parts from Australia for delivery in one year. The total invoice is A$1,000,000 and payable in six months. The expected spot prices to prevail in six months range from $0.55 to $0.85. The following information is available:
Spot rate $0.70/AUD 6-month forward rate $0.68/AUD. Interest rate in US4.00% Interest rate in Australia8.00% Call option premium$0.12E=$0.70 Put Optionpremium$0.10 E=$0.70
- How can the firm hedge using forward rates? Show the payoffs for the expected spot rates.
- How can the firm hedge using money market rates? Show the payoffs for the expected spot rates.
- How can the firm hedge using options. Show the payoffs for the expected spot rates.
- Which hedging would you recommend?
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