Question
Mark Wilson, owner of the Music Studio Inc., will be receiving about 20,000 Euros about one month from now as payments for exports. Mark is
Mark Wilson, owner of the Music Studio Inc., will be receiving about 20,000 Euros about one month from now as payments for exports. Mark is concerned about his exposure as he believes that there are two possible scenarios (1) The Euro would depreciate by 5% over next month (2) The Euro will appreciate by 4% next month. Mark notices that the prevailing spot rate of the Euro is $1.02- and one-month forward rate is $1.015. Mark can purchase a put option that has exercise price of $1.015 and a premium of $.035.
Determine the amount of dollars received (under both the scenarios) by the company if receivables are not hedged. (4 marks)
Determine the amount of dollars received by the Music Studio Inc. if a put option is used to hedge receivables in one month under each of the two exchange rate scenarios. (4 marks)
Determine the amount received if forward hedge is used. (2 marks)
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