Question
Your firm does business in Aruba and will owe AWG 675,000 in 180 days. Since you are concerned about a strong Aruban Florin, you decide
Your firm does business in Aruba and will owe AWG 675,000 in 180 days. Since you are concerned about a strong Aruban Florin, you decide to execute a CURRENCY SPREAD with the following options:
Country | Exercise Price | Premium |
Call Option 1 | USD .55 / AWG | .02 |
Call Option 2 | USD .58 / AWG | .005 |
Spot Rate Today | USD .555 /AWG |
Suppose the Spot Rate on the day the spread was exercised was USD .56/ AWG.
1. Based upon the situation above, describe in detail but concisely the type of spread you would construct and the actions you take to do so.
2. Specify the net cost of your payables in USD after they have been settled.
3. Was the hedge successful? Why or why not? Give quantitative support for your conclusion.
IN ALL OF THE ABOVE TASKS, BE CONCISE, DO NOT RAMBLE GET TO THE POINT!
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