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Suppose you work in the finance division of an American multinational shipping company. Today your firm just signed a contract to export gas to Italy
Suppose you work in the finance division of an American multinational shipping company. Today your firm just signed a contract to export gas to Italy using one of your ships. The contract commits the Italian government to pay 250 million euros (EUR) in 3 months. Given the uncertainty relative to the pandemic, as part of the finance division you are asked to come up with the best hedging option comparing forward, money market instruments, and option contracts. a. Show detailed steps of the hedging strategy using a forward and compute the revenues in USD for the firm. The forward rate is F(USD/EUR) = USD/EUR 2.25. - b. Perform the same analysis of point a), but now use money market instruments to hedge your exposure. Show the revenues in USD for the firm. You need the following data: 1-year interest rate in the US: 2.5% 1-year interest rate in Euro zone: 1% Current spot rate, S(USD/EUR) = USD/EUR 2.242 c. Lastly, perform the hedging using options and compute the minimum amount of revenues in USD for the firme c. Lastly, perform the hedging using options and compute the minimum amount of revenues in USD for the firm. You have the two following options you can choose: Euro option, maturity 3 months Listed options Strike Premium 1 1 L USD/EUR 0.001 Call option: USD/EUR 2.2 Put option: USD/EUR 2.2 USD/EUR 0.001 Assume that the size of each contract is EUR 250,000. When computing the premium, use interest rates as in point b)
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