Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Marcus Pty, a U.S. company, has future receivables of 5,000,000 Australian dollars (AUD) in one year.The following information on spot rates, exercise prices, and probabilities

Marcus Pty, a U.S. company, has future receivables of 5,000,000 Australian dollars (AUD) in one year.The following information on spot rates, exercise prices, and probabilities is available to the company:

Spot rate of AUD = USD 0.45

Oneyear call option: Exercise price = USD 0.40; premium = USD 0.08

Oneyear put option:Exercise price = USD 0.42; premium = USD 0.04

U.S. Australia

Oneyear deposit rate

9% 6%

Oneyear borrowing rate

11% 8%

Rate Probability

Forecasted spot rate of AUD

USD 0.30 50%

USD 0.31 30%

USD 0.32 20%

Now, the company must decide whether to use options or a money market hedge to hedge this position. Work out the best decision for the company by determining the estimate (or probability distribution) of dollar revenue to be received in one year for each type of hedge.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Anthony Saunders, Marcia Cornett

6th edition

9780077641849, 77861663, 77641841, 978-0077861667

More Books

Students also viewed these Finance questions

Question

What different methods may be used to treat bulimia nervosa?

Answered: 1 week ago

Question

What different methods may be used to treat anorexia nervosa?

Answered: 1 week ago