Question
Today the spot rate of the euro is $1.22. The one-year forward rate is $1.17. A one-year call option on euros exists with a premium
Today the spot rate of the euro is $1.22. The one-year forward rate is $1.17. A one-year call option on euros exists with a premium of $0.05 per unit and an exercise price of $1.19. You think the spot rate is the best forecast of future spot rates. You will need to pay 12 million euros in one year. The one-year interest rate in the United States is 5 percent versus an annual interest rate of 11 percent in the eurozone. Determine whether a money market hedge or a call option hedge would be more appropriate to hedge your payables. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
The expected cost of a money market hedge is $ .
The expected cost of a call option hedge is $ .
-Select- hedge is more appropriate because the cost is lower than the expected cost of a -Select- hedge.
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