1. UCD (U.S. based MNC) will receive €250,000 (Note:€ is the symbol for euro) in one year. The current spot exchange rate is $1.20/€ per euro, and the one-year forward exchange rate is $1.14/€. UCD can buy a one-year put option on euros with a strike price of $1.18/€ for a premium of $0.02 per euro. Currently, one-year interest rate is 8.0% in the euro zone and 3.0% in the U.S. Compute the guaranteed U.S. dollar proceeds for UCD if UCD decides to hedge using a forward contract.
$300,000.
$285,000.
$295,000
None of the above.
2. if UCD decides to hedge using money market instruments, what would be the guaranteed U.S. dollar proceeds in this case?
$286,111.11
$277,777.78
$238,425.93
$285,000.00
$300,000.00
3. if UCD decides to hedge using put options on euros, what would be the "expected" U.S. dollar proceeds? Assume that UCD regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. (Note: The time value of money is considered in the upfront cost paid.)
$295,000
$289,850
$285,000
$300,150