Assignment:
Question 1. A European investor who has USD 10 million deposits is very worried about depreciation ofUS dollar. To hedge against a potential risk, the investor is considering various methods of risk management. The market information at this time is the following. One-month forward rate = USD 0.5678 per Euro One-month Euro call: strike price = 0.5600 and premium = 2.00 US cent per Euro One-month Euro put: strike price = 0.5600 and premium = 1.20 US cents per Euro
a)What is the minimum amount of Euro that the investor can receive, using these options? What option do you suggest to use?
b) What is the difference between the above answer (option hedging) and the forward hedging.