Golden Pty Ltd. is a local car manufacturer and an exporter in Australia. Golden just signed a sale agreement to sell vehicles to a German car importer--Denz. Denz will be billed EUR 1,000,000, payable in six months. The current spot exchange rate is AUD1.61/EUR. However, a senior manager in Golden worries that the future foreign exchange rate may fluctuate and hurt the profit. Therefore, the manager asks you, a financial risk analyst, to provide him with an appropriate hedging technique.

The following are information in the currency derivative market:

6-month EUR forward contract with a strike price of AUD1.58/EUR

6-month EUR call option with an exercise price of AUD1.57/EUR (premium is AUD0.05/EUR)

6-month EUR put option with an exercise price of AUD1.56/EUR (premium is AUD0.04/EUR)

Interest rate in Australia is 3% p.a.

Interest rate in Germany is 4% p.a.

(1) You conduct due diligence research and believe that AUD will depreciate dramatically in 6 months. If your analysis is correct, will you suggest that your manager hedge against EUR receivable?

(2) Disregard question (1). If you decide to hedge through options contract, what is the cost of premium in dollar today?

(3) To further avoid exchange rate risk, Golden decided to open a subsidiary in Germany to manufacture cars and sell cars in Germany. However, you remind the manager that Golden is still subject to translation exposure. The subsidiary in Germany has an asset of EUR 2.5 billion and a liability of EUR 1.5 billion. If the exchange rate were to change from AUD1.61/EUR to AUD1.67/EUR, what would be the gain in billion dollar?