Assume 214 days between the date of February 14th, 2012 and September 15^th, 2012 when the Euro exposure of €3,000,000 receivable occurs.

ADG has a €3,000,000 receivable in 214 days on September 15^th. The current spot exchange rate (S)=$1.3088/€, 7-month forward exchange rate (F)=$1.3090, the 7-month dollar interest rate (bid)=0.78% and 7-month euro interest rate (ask)=1.40%. The put option on the euro with strike (exercise) price of $1.31 sells for a premium of 5.09 cents (Ask) per euro. 

Question: Compare three alternative hedging methods for this: Forward, money market, and option hedges. 

 

 

2. Assume 117 days between the date of February 14th, 2012, and June 10^th, 2012 when the Yen exposure of ¥2,400,000,000 payable occurs.

ADG has a ¥2,400 million payable in 4 months based on an agreement to buy 300,000 RAM chips at ¥8000 each by June 10^th (4 months out, payable in Yen).  The relevant market data include: The current spot exchange rate of $0.01274/¥, four-month forward exchange rate of $0.01274/¥, four-month call option on yen with the strike price set at 127 cents for 100 yen that is selling for 3.11 (Ask) cents per 100 yen. ADG's borrowing interest rate in dollars is 0.62%, while lending interest rate in yen is 0.18%.

Question: Compare three alternative hedging methods for this: Forward, money market, and option hedges.