Coleman needs 100,000 euros in 1 year, then it could convertdollars to euros and deposit the euros in a bank today.The Colemanpurchasing team received this price quote of €100,000 today wherethe current spot rate was $1.1800/€, which equates to the U.S.dollar price of $118,000.
Coleman's director of finance now wondered if the firmshould hedge against more fluctuation in the exchange rate.
Three approaches were possible:
1) Hedge in the forward market. The 1-year forward exchange quotewas $1.20/€.
2) Hedge in the money market. Coleman could borrow U.S. dollarsfrom its U.S. bank at 7.00% per annum. The EU investment rate is9.00% per annum.
3) Hedge with foreign currency options. The day the Euros areneeded the call options at $1.2000/€ could be purchased for apremium of $0.03. (Note: First you need to figure outthe option premium in percentage. The spreadsheet cell D32 is notset-up for USD)
Discuss ifColeman should hedge its transaction exposure of EUR 100,000. Ifyou recommend that the company should hedge, which of the hedgingalternatives would better serve Northwind shareholders?

Assumptions		Value
1-year A/P in €		?
Spot rate, ($/€)		?
1-year forward rate, ($/€)		?
EU investment rate		?
borrowing rate, USD, per annum		?
Coleman's WACC		10.000%
Time to maturity (in months)		12.00
Options on Euro: 1-year Strike price,($/€)		Call Option
Strike price ($/£)		?
Option premium ? Solve this using step by step calculations