Wendy Wallace, Assistant Treasurer for Magic International, is working on potential hedging strategies because the company has transaction exposure to the Euro. Wendy first netted out the 90-day Euro exposures of all accounts receivable and accounts payable. As a result, she found the company had exposure to currency fluctuations because a net of 10 million Euros were owed. To eliminate the risk, she could use futures contracts with a forward rate of $1.40 per Euro. She could also use an option on Euros with a strike price of $1.38 and a premium of $.04. You are an advisor that Ms. Wallace hires periodically because of your expertise in currency matters.

Instruction:

Write a memorandum to Ms. Wallace explaining the alternative of hedging with a futures contract as that strategy compares with using an option hedge.

You may ignore the time value of money difference between the present value of option premiums and the future value costs of using options.