Sunset Inc., an Australian company, has concluded a large sale of computer systems for inventory management to a customer in France for 3,000,000 with payment due to be received in ninety days. Because this is a sizable contract for the firm, and because the contract is denominated in Euros rather than Australian dollars, Sunset is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

DATA VALUES

Account receivable due in 90 days, in 3,000,000

Spot rate (A$/) 1 = A$1.56

90-day forward quote 1 = A$1.5545

Expected spot rate in 90 days 1 = A$1.5782 A$

investment rate 4.00% p.a.

investment rate 6.00% p.a. A$

borrowing rate 6.00% p.a.

borrowing rate 12.00% p.a.

Call option strike price (ATM), 90 days, on 1 = A$1.56

Total call option premium (2%) A$93,600

Put option strike price (ATM), 90 days, on 1 = A$1.56

Total put option premium (2.5%) A$117,000

Cost of capital 10.00% p.a.