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QUESTION QUESTION 3 OF 4 GreenGo Ltd. (a London-based firm) has future receivables of 45,000,000 in 90 days. Its finance manager must decide whether to
QUESTION QUESTION 3 OF 4 GreenGo Ltd. (a London-based firm) has future receivables of 45,000,000 in 90 days. Its finance manager must decide whether to use hedging techniques, and also he intends not to have less than 38min. The existing spot rate is 0.8400/ and the 90-day forward rate is 0.8505/. The finance manager created a probability distribution for the future spot rate in one year as follows: Probability Future Spot Rate E0.8250/ 0.8400/ 25% 20% 25% 0.8550/ EO.8700/ 30% The following 90-day options on euro are available in the market: Strike price Premium Moreover, the following money market rates are available: Required: Deposit rate Borrowing rate Put Optic 0.8350/ E0.0400/ in the UK 0.8% p.a. 4.2% p.a. Call Option 0.8650/ 0.0300/ in eurozone 0.4% p.a. 3.4% p.a. Future Spot Rate 0.8250/ 0.8400/ 0.8550/ 0.8700/ Probability 25% 20% 25% 30% The following 90-day options on euro are available in the market: Put Option E0.8350/ Strike price Premium 0.0400/ Moreover, the following money market rates are available: in the UK 0.8% in eurozone 0.4% p.a. Deposit rate p.a. 4.2% 3.4% p.a. Borrowing rate p.a. Required: a. Given this information, determine a forward hedge, a money market hedge, a currency options hedge, and remaining unhedged positions for this transaction. (18 points) b. Decide whether GreenGo should hedge its receivables position. How? And why? (7 points) Call Option 0.8650/ 0.0300/
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