ABC Corportion has 90-day receivables of Euro 500,000. The following info is available:
Spot rate of the Euro: $1.20 per Euro
90-day forward rate: $1.15 per Euro
90-day interest rates are as follows:
90-day deposit rate US = 5% Euro = 5%
90-day borrowing rate US = 7% Euro = 7%
A call option on Euro that expires in 90 days has an exercise price of $1.20 and has a premium of $0.03. A put option on Euro that expires in 90 days has an ecercise price of $1.20 and has a premium of $0.02, The Euro spot rate in 90 days is forecasted to be:
Possible Rate $1.15 and Probability of 30%
Possible Rate $1.10 and Probability of 70%
ABC Corporation is considering 1) a forward hedge 2) a money market hedge 3) an option hedge and 4) remaining un-hedged
You have been hired as a consultant to decide on the best possible hedge. Which one of the alternatives would you recommend and why?