Assume that a firm expects to receive CHF50 million in one year. The current spot rate is CHF/EUR = 0.6323 . The following one-year options on CHF are available:

Option Exercise Price Premium (per unit)

Put CHF/EUR = 0.6200 EUR 0.04

Call CHF/EUR = 0.6120 EUR 0.06

Assume the following money market rates:

Euro zone (EUR) Switzerland (CHF)

Deposit rate 2.45% 1.90%

Borrowing rate 2.85% 2.50%

The probability distribution for the forecasted spot rate for CHF in one year is:

Future Spot Rate Probability

EUR 0.6120 21%

EUR 0.6190 50%

EUR 0.6290 29%

Given the information above, determine whether a currency options or a money market hedge would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy and decide whether the firm should hedge its receivables position.