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Assume that Jarret Co. (a U.S. firm) expects to receive 1 million euros in 1 year. The spot rate of the euro is $1.20. The 1-year forward rate of the euro is $1.21. Jarret expects the spot rate of the euro to be $1.22 in 1 year. Assume that 1-year put options on euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit. Assume the following money market rates:
United States
Eurozone
Deposit Rate
8%
5%
Borrowing Rate
9%
6%
(a) Determine the dollar cash flows to be received if Jarret uses a money market hedge. (Assume Jarret does not have any cash on hand)
(b) Determine the dollar cash flows to be received if Jarret uses a put option hedge.
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