When a forward market already existed, why was it necessary to establish currency futures and currency options contracts? Give five reasons.
Assume that Alfred Company, Inc. expects to pay Euro500, 000 in one year. The existing spot rate of the euro is $0.60. The one-year forward rate of the Euro is $0.63.
A one-year put option on euro is available with an exercise price of $0.63 and a premium of $0.03 per unit. A one-year call option is available on euro with an exercise price of $0.63 with a premium of $0.04 per unit.
Are you facing foreign currency exposure due to the appreciation or depreciation of dollar?
How would you hedge your exposure with forward contracts and option contracts?
What will be the dollar cost of hedging with forward contract?
What will be dollar cost of hedging with options?
Which one would you choose and why?