NEC Inc. has sold computer components to a European company for €200,000 with payment due in 90 days. The following information is available:
*Spot exchange rate is €1 = $0.8100
*Management's forecast of the spot rate 90 days later: it is equally likely that the spot rate 90 days later will be €1 = $0.8000, €1 = $0.8050, or €1 = $0.8150
*90-day call option on €200,000 at exercise price of €1=$0.8100 and a $0.01 premium per €
*90-day put option on €200,000 at exercise price of €1=$0.8100 and a $0.01 premium per €
Suppose NEC Inc. wishes to hedge the dollar value of this transaction using one of the option contracts mentioned above.
(a). If NEC Inc. decides to hedge the exchange rate risk for this transaction, should NEC Inc. use the call option or the put option to hedge this transaction? Explain Briefly. (No calculation is needed here)
(b) Calculate the expected (or average) dollars received in 90 days for the option hedge you have chosen in part (a). Calculate the expected (or average) net profit (or loss) of this hedging strategy.