Question
TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEKs Italian
TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEKs Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the following quotes: Spot rate USD1.2000/EUR 3 month forward rate USD1.2180/EUR Three month euro interest rate 4.2% per year 3 month put option on euros at strike price of USD1.0800/EUR 3.4% TEKs weighted average cost of capital 9.8% Which alternative should TEK choose if it is willing to take a reasonable risk and has a directional view that the euro may be appreciating versus the dollar during the next three months? What would TEK expect the market direction to be?
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