Question
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.
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