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Your company produces beach toys for the Cayman islands. The invoice for the upcoming delivery will be in Cayman Islands Dollar (KYD), which currently trade
Your company produces beach toys for the Cayman islands. The invoice for the upcoming delivery will be in Cayman Islands Dollar (KYD), which currently trade at 1.1202. The payment to be received is 492000 KYD in 110 days. You are thinking about hedging the exposure. The following options are available: put options, forward contracts or a money market hedge. Of course, leaving the exposure unhedged is also a possibility. Interest is calculated with 360 days p.a. The probability distribution of forecasted exchange rates is available as well. Current spot rate (KYDEUR) 1.1202 Forward rate for 110 days 1.1303 Put option premium 0.042 Put option exercise price 1.1004 Annualized interest rates KYD borrow 0.0316 KYD lend 0.0288 EUR borrow 0.0395 EUR lend 0.0316 Forecasts Probability KYDEUR 0.06 0.7136 0.08 0.8805 0.10 0.9466 0.57 1.1258 0.10 1.2983 0.09 1.4204 Please calculate the expected amount that you will receive in in 110 days for each possible alternatives. If you were risk neutral, which alternative would you choose? Please round all answers to two decimal points. The expected amount (in ) you will receive in 110 days is ... Unhedged: Money Market hedge: Forward: Put Option: Pull Option: If you were risk-neutral, you would choose
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