S: Spot Rate $1.20:1 Cost of 1-year put or 1-year call Exercise Price of $1.24:1 S: Forward Rate $1.24:1Persure S5 1 Yr. S interest rate l 1 Yr. interest rate | 8.5% 5.096 Per 25 million of exposure $500,000 | (40 points. 10 points each) 1. Your company will receive 25 million in 1 year from a German customen a. Assuming no hedges, calculate: i. The most likely amount in U.S. dollars that you will receive in 1 year. li. The amount you would receive if the euro strengthened to $1.30:1 ii. The amount you would receive if the euro weakened to $1.20:1. 5: Spot Rate $1.201.00 Forward Rate $1.24:1.00 Cost of put or of call Per of exposure 2 US cents S: 1 Yr. S interest rate l 1 Yr. interest ratel 85% 50% Perd25millorerexposuret-s500,ooo 500,000 uestion 1 continued with identical chart above The CEO is happy with the likely expected value, which is the amount calculated in part al). How would you set up a hedge that guarantees you will receive that U.S dollar amount? You need only choose one method. b. The next day, your CEO changes her mind. She says she thinks the euro will strengthen. She is a bit uncertain, however, so instructs you to limit the downside she is wrong. Show a strategy that will meet her demands. Prove it will be successful by showing outcomes with the three exchange rates from part a c. $: Spot Rate $1.20:1 S: Forward Rate $1.24-1 1 Yr. S interest rate | 10.0% Cost of 1-year put or 1-year call Exercise Price of $1.24:1 Per of exposure Per 25 million of exposure 2 US cents $500,000 1 Yr. interest rate | 5.0% Question 1 continued with modified chart above You notice that the interest rate in the US. increased to 10% but nothing else d. changed (as seen in the chart above). Find a strategy that guarantees a higher USD amount than what you found in part a(). Show your calculations S: Spot Rate $1.20:1 Cost of 1-year put or 1-year call Exercise Price of $1.24:1 S: Forward Rate $1.24:1Persure S5 1 Yr. S interest rate l 1 Yr. interest rate | 8.5% 5.096 Per 25 million of exposure $500,000 | (40 points. 10 points each) 1. Your company will receive 25 million in 1 year from a German customen a. Assuming no hedges, calculate: i. The most likely amount in U.S. dollars that you will receive in 1 year. li. The amount you would receive if the euro strengthened to $1.30:1 ii. The amount you would receive if the euro weakened to $1.20:1. 5: Spot Rate $1.201.00 Forward Rate $1.24:1.00 Cost of put or of call Per of exposure 2 US cents S: 1 Yr. S interest rate l 1 Yr. interest ratel 85% 50% Perd25millorerexposuret-s500,ooo 500,000 uestion 1 continued with identical chart above The CEO is happy with the likely expected value, which is the amount calculated in part al). How would you set up a hedge that guarantees you will receive that U.S dollar amount? You need only choose one method. b. The next day, your CEO changes her mind. She says she thinks the euro will strengthen. She is a bit uncertain, however, so instructs you to limit the downside she is wrong. Show a strategy that will meet her demands. Prove it will be successful by showing outcomes with the three exchange rates from part a c. $: Spot Rate $1.20:1 S: Forward Rate $1.24-1 1 Yr. S interest rate | 10.0% Cost of 1-year put or 1-year call Exercise Price of $1.24:1 Per of exposure Per 25 million of exposure 2 US cents $500,000 1 Yr. interest rate | 5.0% Question 1 continued with modified chart above You notice that the interest rate in the US. increased to 10% but nothing else d. changed (as seen in the chart above). Find a strategy that guarantees a higher USD amount than what you found in part a(). Show your calculations
