Taylor Corporation is an American import oriented business based in Chicago. It must pay an amount of

EURO 120,000 in 60 days' time for purchased commodities. At the moment, the spot exchange rate is

USD 1.1950/ EURO. It runs the risk that the EURO will appreciate against the USD. This will increase its

costs. To minimize this risk, three scenarios of hedging can be offered to this company.

Scenario 1: the company can hedge its risk with EURO future contract having a size of EUR 60,000, at

future rate specifically USD 1.1960/EURO. In two months' time, the spot rate moves to USD 1.1975/EURO

and future rate changes into USD 1.1985/EURO.

Scenario 2: the corporation will purchase one call option for the full amount with an exercise rate equal

to USD 1.1950/EURO for which it has to pay a premium of 2% of the value of the option.

Scenario 3: the company can purchase a forward EURO contract at forward rate of EURO/ USD= 1.1970.

Analyze each scenario and compare them to be able to recommend the most advantageous one to Johnson

Corporation.