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?