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Calculate amount payable by mel inc by using forward market

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Mel Inc, a US based company is importing supplies worth €12 million from an Italian company. The payment for the supplies is due in one-year time. Since the currency rates fluctuate over time, Mel Inc is trying to propose the best hedging strategy.

Current spot rate                            $1.7366/70/ €
1-year forward contract                      $1.7402/08/ €
US $ interest rate (annualized)                     11%
Euro interest (annualized)                             8.5%

Based on the information, you are required to:

Problem (i) Calculate the amount payable by Mel Inc by using forward market hedge.

Problem (ii) Calculate the amount payable by Mel Inc by using money market hedge.

Problem (iii) Recommend with reason, the best hedging strategy for Mel Inc.

Reference no: EM132795977

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