Instructions

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You are a financial analyst for a multinational company, and your company is exposed to foreign exchange risk due to international operations. You are tasked with calculating and Analyzing potential gains or losses from a currency transaction to assess the effectiveness of a proposed Forex risk management strategy.

a. Scenario: Your company is a U.S.-based exporter that is about to receive payment of 1,000,000 from a European customer in 90 days. The current exchange rate is 1 EUR = 1.15 USD. Your company is concerned that the Euro (EUR) may appreciate during this period.

Calculate the potential gain or loss if your company does not hedge this transaction and the EUR appreciates to an exchange rate of 1 EUR = 1.20 USD in 90 days.

b. Scenario: Your company decides to hedge the EUR payment using a forward contract with a rate of 1 EUR = 1.17 USD for delivery in 90 days. Calculate the gain or loss that your company would realize on the forward contract if the spot rate in 90 days is 1 EUR = 1.20 USD.

c. Scenario: In addition to the forward contract, your company is considering using a put option to hedge against EUR appreciation. The put option has a strike price of 1 EUR = 1.18 USD and a premium cost of $5,000. Calculate the total cost (including the premium) and the gain or loss if the spot rate in 90 days is 1 EUR = 1.20 USD.

d. Compare the results of the three scenarios (no hedge, forward contract hedge, and put option hedge) in terms of potential gains or losses. Discuss the advantages and disadvantages of each Forex risk management strategy and provide recommendations based on your analysis.