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You are trying to decide how to hedge euro 5,000,000 accounts receivable due in one year. Current interest rates and exchange rates are: Spot rate:

You are trying to decide how to hedge euro 5,000,000 accounts receivable due in one year. Current interest rates and exchange rates are:

Spot rate: $1.25/ euro

1-year forward rate: $1.18/ euro

1-year interest rates:

interest rate: 2.20% per annum

$ interest rate: 2.00% per annum

Call option: $1.20 strike, premium $0.025/

Put option: $1.20 strike, premium $0.0125/

If you are unhedged, what is your A/R payment in USD given different future spot rates? Complete the table below. In general, what is the accounts receivable in dollars if unhedged.

Future Spot Rate A/R proceeds in USD
1.10
1.15
1.20
1.25
1.30

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