ABC is a us company that just sold goods to a French Company for 800 million euros with payment due in 4 months. Revenue for ABC is 1.5 billion euros/ year. assume the following: Spot rate $.77/Euro 4 month forward rate $.79/Euro 4 month French interest rate 8% p.a. 4 month US interest rate 6% p.a. 4 month call option on euros at a strike price of $.78/Euro with a 3% premium 4 month put option on euros at a strike price of $.765/Euro with a 4 %premium
a. How can ABC hedge this risk?
b. Which alternative would you choose and why?
c. Does the French company have any transaction risk as a result of this deal? ( Start answer with yes or no)
d. Should ABC company hedge this transaction?
e. what is the breakeven exchange rate between the forward market hedge and your option alternative (the one you used in Part A)?