Reference no: EM132682149
Use the following information to answer the following four questions:
The Atlas Corporation, a U.S.-based software company, needs to hedge its 90-day exposure to the euro. Atlas sells the software to a French distributor and buys services from a German supplier. All transactions are settled in euro. Atlas estimates the current dollar value of its receipts from its French customer at $90 million and its German payables at $28 million. There is a high degree of uncertainty in the euro exchange rate against the dollar. The following information is available:
Spot $1.2400/€
3-month forward $1.2000/€
3-month futures $1.2200/€
90-day call option $1.2100/€ strike; $ 0.0400/€ premium
90-day put option $1.2100/€ strike; $ 0.0200/€ premium
90-day dollar interest rate 4.80% p.a. (deposit) 8.80% p.a. (loan)
90-day euro interest rate 7.60% p.a. (deposit) 12.00% p.a. (loan)
- What should Atlas do if it wants to hedge with forwards and how much will it pay or receive? (Please answer the question fully: if your answer is sign a forward contract, that is not an answer. It is a repeat of the question). Explain exactly what Atlas should do, and how much it would receive or pay with certainty (don't forget the units).
- What should Atlas do if it wants to hedge with options and how much will it pay or receive? Same details as in questions 1
- If Atlas wants to hedge with options, will it guarantee a maximum amount of dollars, a maximum amount of euro, a minimum amount of dollars, or a minimum amount of euros? Explain your answer in a few words.
- If Atlas wants to use money market hedge, how much and in what currency should it borrow and how much and in what currency should it deposit.
Show all the calculations needed for questions 1, 2, and 4.