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Waterloo Company expects to receive 5 million euros in one year from exports. It can use any one the following strategies to deal with the
Waterloo Company expects to receive 5 million euros in one year from exports. It can use any one the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies: a. unhedged strategy b. money market hedge C. option hedge The spot rate of the euro as of today is $1.10. Interest rate parity exists. Waterloo Company uses the forward rate as a predictor of the future spot rate. The annual interest rate in the eurozone is 8% versus an annual interest rate of 5% in the U.S. Put options on euros are available with an exercise price of $1.17, an expiration date of one year from today, and a premium of $0.06 per unit. Estimate the dollar cash flows it will receive as a result of using each strategy. Which hedge is optimal? O a. The cash flow of the put option hedge is $5,550,000. The cash flow of the money market hedge is 5,301,145. The cash flow of the unhedged is 5,612,473. The unhedged strategy is more favorable than the money market hedge and the put option hedge. O b. The cash flow of the put option hedge is $5,067,000. The cash flow of the money market hedge is 5,512,000. The cash flow of the unhedged is 5,241,000. The money market strategy is more favorable than the put option hedge and the unhedged strategy. O C. The cash flow of the put option hedge is $5,347,222. The cash flow of the money market hedge is 5,347,222. The cash flow of the unhedged is 5,347,222. The three strategies is identical. O d. The cash flow of the put option hedge is $5,550,000. The cash flow of the money market hedge is 5,347,222. The cash flow of the unhedged is 5,347,222. The put option hedge is more favorable than the money market hedge and the unhedged strategy. O e. The cash flow of the put option hedge is $5,050,000. The cash flow of the money market hedge is 5,050,000. The cash flow of the unhedged is 5,657,000. The unhedged strategy is more favorable than the money market hedge and the put option hedge
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