Question
Your company will receive 25 million in 1 year from a German customer $: Spot Rate $1.20:1.00 Cost of 1-year put or 1-year call Exercise
Your company will receive 25 million in 1 year from a German customer
$: Spot Rate | $1.20:1.00 |
| Cost of 1-year put or 1-year call Exercise Price of $1.24:1 | |
$: Forward Rate | $1.26:1.00 |
| Per of exposure | 2 US cents |
1 Yr. $ interest rate | 8.5% |
| Per 25 million of exposure | $500,000 |
1 Yr. interest rate | 5.0% |
1) The CEO wants certainty about the dollars the company will receive. Choose the hedge that guarantees you will receive that U.S. dollar amount. There are two options but pick one with the highest value
a) Buy a call option on British pounds
b) Buy a put option on British pounds
c) Money Market Hedged
d) Forward hedge
2) The next day, your CEO changes her mind. She says she thinks the euro will strengthen. She is a bit uncertain, however, so instructs you to create a strategy where she can benefit from the euro appreciation but provide protection if she is wrong. Choose strategy that will meet her demands.
a) Buy a call option on British pounds
b) Forward Hedge
c) Money Market Hedge
d) Buy a put option on British pounds
3) Assume the Euro strengthens to $1.30:1.00. What were the net proceeds from the receivable, adjusting for any hedging costs from the prior question. Answer in terms of millions of dollars.
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