You are a Turkish exporter. Recently, Mercedes Benz, a German company, purchased a large amount of Anatolian leather for the interiors of its high-end vehicles. You are expecting a payment of 12million Euros (EUR) in 1 year. You are concerned that the price of the Turkish Lira (TRY) is going to change significantly in 1 year and must now manage your exposure to foreign exchange risk.

Given:

Todays spot rate: 3.4 TRY/EUR

1 year forward rate: 3 TRY/EUR

Option fee: .06 (against final exchange if option is exercised)

European interest rate: .06

Turkish govt. bond rate: .04

Spot rate in one years time: 4.1 TRY/EUR

Calculate the following three approaches. Be sure to show your work to get partial credit.

1. A wait and see approach
2. Establish a forward contract, calculating also for the option fee in the event that you are in the money.
3. Perform a Money Market Hedge
4. Which approach did you find the most appealing? Why? Be brief.