Consultant to decide on the best possible hedge

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Reference no: EM131878167

ABC Corporation has 90-day payables of euro 200,000. The following information is available:

Spot rate of the euro: US$ 1.18 per Euro

90-day forward rate of the euro: US$ 1.20 per Euro

90-day interest rates are as follows:

USA Euro-land

90-day deposit rate 4.0 5.0 %

90-day borrowing rate 6.0 % 7.0 %

A call option on euro that expires in 90-days has an exercise price of $ 1.15, and has a premium of $ 0.08. A put option on euro that expires in 90-days has an exercise price of $1.15, and has a premium of $. 0.045

The spot rate of the euro in 90-days is forecasted to be:

Possible Rate Probability

US$ 1.19 40 %

US$ 1.22 60 %

ABC Corporation is considering:

a) a forward hedge

b) a money market hedge

c) an option hedge and

d) remaining un-hedged

You have been hired as a consultant to decide on the best possible hedge. Which one of the alternatives you will recommend, and why?

Reference no: EM131878167

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