3M has submitted a bid for a 20 million contract to supply N95 masks to a building...
Question:
3M has submitted a bid for a €20 million contract to supply N95 masks to a building company in Paris on January 1 and the announcement of the winning bid would not be until May 1.
3M wants to guarantee that the exchange rate does not move against it between the time it bids and the time it gets paid on Dec 31st (IF it wins the contract).
Current spot rate is $1.469/€. The forward rate on April 1 is $1.512/€. The current premium for put option to sell €1 million on Dec 31st at $1.469/€ is $15,000.
The CFO of 3M is now facing two hedging strategies below:
I. Sell €20 million forward on January 1 for delivery on Dec 31st at $1.469/€
II. Buy put option on Jan 1st to sell €20 million on Dec 31st at $1.469/€
How small does the probability of winning the bid on May 1st have to be for 3M to be no different between these two hedging strategies?
Please use at least 4 decimal points in the middle steps and enter your answer up to 2 decimal points in the % term (e.g., 12.34%).
International Business Law And Its Environment
ISBN: 9781305972599
10th Edition
Authors: Richard Schaffer, Filiberto Agusti, Lucien J. Dhooge