Prime Emerald Inc. is an upscale rug manufacturer in Flint, Michigan, that just developed a deal with a major high-end gallery in Italy to display their rugs over the course of one year. The rugs are supposed to be shipped by 08/15 and arrive no later than 9/15. The Gallery is willing to front the expenses of the rugs transition to Milan, Italy, and the company within five days will receive payment of 500,000 euros. It is expected that 100,000 of the euros will appreciate substantially on 9/25. Unfortunately the rugs have been delayed and it will take another month to receive them.
1. Explain how Prime Emerald Inc. can hedge the current position with Italy.
a. Explain the hedging positions under each currency derivative including forward contracts, future contract and options contract.
2. Explain the potential risks and losses by waiting another month to see if the rugs make it before they decide to hedge?