Question
Using the following information and answer the following 5 questions. US based River Hawk company just exported to Mania in Spain in the amount of
Using the following information and answer the following 5 questions.
US based River Hawk company just exported to Mania in Spain in the amount of 1 million Euro due in one year.
| Forward | $ 1.25 | EUR/USD | Exercise | Premium | |
| Spot | $ 1.20 | EUR/USD Put | $ 1.25 | $ 0.015 | |
| Call | $ 1.23 | $ 0.015 | |||
| Future Spot | Probability | ||||
| $ 1.150 | 15% | USA | Spain | ||
| $ 1.175 | 25% | Deposit Rate | 2% | 1% | |
| $ 1.200 | 35% | Borrowing Rate | 3% | 2% | |
| $ 1.250 | 20% | ||||
| $ 1.300 | 5% |
a) what is the expected payoff (Payment) in one year if the company uses a forward hedge?
b) What is the expected payoff if the company uses the money market hedge?
c) What is the expected payoff if the company uses an option hedge?
d) What is the expected payoff if the company uses no hedge (naked)?
e)
What is your recommendation ?
| Forward hedge | ||
| Money Market hedge | ||
| Option Hedge | ||
| Naked Hedge |
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Foundations Of Finance
Authors: Arthur J. Keown, John H. Martin, J. William Petty
9th Edition
978-0134083285, 134083288, 978-0134084015
