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a) Your company which is located in the United States imports raw materials from Germany, and analyst predicts that the euro will appreciate significantly in
a) Your company which is located in the United States imports raw materials from Germany, and analyst predicts that the euro will appreciate significantly in the future. State giving reasons the advise you would give your company regarding hedging of its payables which are invoiced in euros. (4 marks) b) Idapco, a U.S. firm will receive 1 million in one year from its U.K. subsidiary. Given the following information: 360-day U.K. borrowing interest rate =7% 360-day U.K. lending interest rate =3% 360-day U.S. borrowing interest rate =5% 360-day U.S deposit interest rate =3% 360-day forward rate of the British pound = US\$1.39 Spot rate of the British pound = US\$1.36 One-year call option: Exercise price =$1.38 premium =$.03 One-year put option: Exercise price =$1.40 premium =$.04 Expected one-year spot rate =$1.41 Showing and explaining all your workings, determine whether or not the firm should use an options hedge or a money market hedge to hedge its receivables. (21 marks)
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