Money Corp expects to receive 150,000 Euros in one year. The existing spot rate of the Euro is $1.06. The one-year forward rate of the Euro is $1.12. TXU created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate Probability

$1.04 30%

$1.08 50%

$1.14 20%

Assume that one-year put options on Euros are available, with an exercise price of $1.11 and a premium of $0.03 per unit. One-year call options on Euros are available with an exercise price of $1.08 and a premium of $0.02 per unit.

Assume the following money market rates:

U.S. Germany

Deposit rate 4% 6%

Borrowing rate 5% 7%

Given the information,

1) Determine whether a forward hedge, money market hedge, or currency options hedge (with call or put options) would be most appropriate.

2) Compare the most appropriate hedge to an unhedged strategy

3) Decide whether Money Corp should hedge its receivables position and calculate the real cost of hedging.

Please show work.