Part II. Calculation Questions: (15 points) 1. You are hired as a financial analyst by a manufacturing company in the United States. Your company expects to pay 10 million Euro to a supplier in six months. At the same time, your company also expects to receive 5 million Euro from a customer. The current between US dollar and Euro is 1.31 USD/EUR. In order to hedge the transaction exposure. in choose the following financial derivatives contracts to hedge the transaction exposure. Forward contract: A forward contract on Euro currency with a 6-month forward rate of 1.30 USD/EUR Call option: A European call option with a strike price of $7.30 USD/EUR. The option contract expires in six months. The call option premium is $0.02 per Euro. Put option: A European put option with a strike price of 1.30 USD/EUR. The option contract expires in six months. The put option premium is $0.01 per Euro. (1) How much is your company's transactio contract and the option contract respectively to hedge the Euro currency exposure? (1 point) your company's transaction exposure? How would you use the forward cuvely to hedge the Euro currency transaction (2) Suppose the company followed your advice and hedged the Euro currency exchange risk by using the derivatives contracts you chose in (1). The exchange rate between Euro and U.S. dollar turns out to be 1.50 USD/EUR at the end of the six months. Calculate the gains or losses on the forward and option contract. Is forward contract or option contract a better hedging strategy in this case? (1 point) (3) Suppose the company followed your advice and hedged the Euro currency exchange risk by using the derivatives contracts you chose (1). The exchange rate between Euro and U.S. dollar turns out to be 1.20 USD/EUR at the end of the six months. Calculate the gains or losses on the forward contract and option contract. Is forward contract or option contract a better hedging strategy in this case? (1 point) (4) Draw the payoff graph for the forward contract and option contract that you chose in (1). (i.e. the payoff graph should show the gains or losses on the derivative contracts with respect to the changes in the Euro exchange rate. Show the breakeven prices in the chart.). (1 point) Part II. Calculation Questions: (15 points) 1. You are hired as a financial analyst by a manufacturing company in the United States. Your company expects to pay 10 million Euro to a supplier in six months. At the same time, your company also expects to receive 5 million Euro from a customer. The current between US dollar and Euro is 1.31 USD/EUR. In order to hedge the transaction exposure. in choose the following financial derivatives contracts to hedge the transaction exposure. Forward contract: A forward contract on Euro currency with a 6-month forward rate of 1.30 USD/EUR Call option: A European call option with a strike price of $7.30 USD/EUR. The option contract expires in six months. The call option premium is $0.02 per Euro. Put option: A European put option with a strike price of 1.30 USD/EUR. The option contract expires in six months. The put option premium is $0.01 per Euro. (1) How much is your company's transactio contract and the option contract respectively to hedge the Euro currency exposure? (1 point) your company's transaction exposure? How would you use the forward cuvely to hedge the Euro currency transaction (2) Suppose the company followed your advice and hedged the Euro currency exchange risk by using the derivatives contracts you chose in (1). The exchange rate between Euro and U.S. dollar turns out to be 1.50 USD/EUR at the end of the six months. Calculate the gains or losses on the forward and option contract. Is forward contract or option contract a better hedging strategy in this case? (1 point) (3) Suppose the company followed your advice and hedged the Euro currency exchange risk by using the derivatives contracts you chose (1). The exchange rate between Euro and U.S. dollar turns out to be 1.20 USD/EUR at the end of the six months. Calculate the gains or losses on the forward contract and option contract. Is forward contract or option contract a better hedging strategy in this case? (1 point) (4) Draw the payoff graph for the forward contract and option contract that you chose in (1). (i.e. the payoff graph should show the gains or losses on the derivative contracts with respect to the changes in the Euro exchange rate. Show the breakeven prices in the chart.). (1 point)
