Magnetronics, Inc., a U.S. company, owes its Taiwanese supplier NT$205 million in three months. The company wishes to hedge its NT$ payable. The current spot rate is NT$1 = US$0.03987, and the three-month forward rate is NT$1 = US$0.04051.
Magnetronics can also borrow/lend U.S. dollars at an annualized interest rate of 12% and Taiwanese dollars at an annualized interest rate of 8%.
What is the U.S. dollar cost for Magnetronics by forward hedge?
What is the U.S. dollar cost by money market hedge? Describe the procedure it would use to get this price.
If the firm wanted to use option hedge, should it buy a call or put on NT$?