FIN Integrated is an Irish company that has an $8,000,000 payable due in three months. There is concern about how many Euros will be needed to

service this debt and the management has sought your expertise in suggesting alternatives to reduce the currency risk associated with this

payable.

You have compiled the following information: 

Spot rate: $1.38 per Euro or €0.7246 per $

90-day forward rate: $1.35 per Euro or €0.7407 per $

90-day US$ interest rate: 4% per annum

90-day Euro interest rate: 5% per annum

90-day call option on $ with a strike rate of €0.7246 and premium of €0.025 per $

90-day call option on $ with a strike rate of €0.7407 and premium of €0.01 per $

90-day put option on $ with a strike rate of €0.7246 and premium of €0.02 per $

90-day put option on $ with a strike rate of €0.7000 and premium of €0.015 per $

a. Using the data above, how can the Irish company hedge its exposure? What are the cash flows associated with each method? (Assume that the options expire on the same day the receivable is due) Highlight the benefits and costs of each approach.

b. Suppose there is a futures contract available on the US$ with the same maturity at the payable of the Irish firm above. The current futures

price is €0.7407 and the contract size is $100,000. The initial margin requirement on the futures contract is €2000 and the maintenance

margin is €1500. Would you recommend the use of futures contract instead of the forward contract above to hedge the currency exposure? Why or why not?