Anatole, the treasurer of a French company, will pay $421,000$ US Dollars in $3$ months from now for raw

materials purchased by his firm. Anatole believes that there are two possible scenarios: $(1)$ the US Dollar

will depreciate by $3\%$ over the next $3$ months or $(2)$ the US Dollar will appreciate by $5\%$ over the next

$3$ months. There is a $40\%$ chance that Scenario $1$ will occur. There is a $60\%$ chance that Scenario $2$ will

occur.

Anatole notices that the prevailing spot rate of the Dollar is BUR $0\mathrm{.}9170,$ and the $3-$month forward rate

is about EUR $0\mathrm{.}9105.$ William can purchase a call option over the counter from a securities firm that

has a strike price of EUR $0\mathrm{.}9000,$ a premium of EUR $0\mathrm{.}02.$ and an expiration date of $3$ months from

now.

Anatole can borrow funds denominated in Euros at a rate of $2\mathrm{.}5\%$ over a $3-$month period. It is possible

to earn $1\%$ interest over a $3-$month period on a US Dollars deposit

$1.$W hat is the optimal hedging technique?

According to you, what decision should Anatole make?

$3.$

At the maturity date, the exchange rate is EUR $0\mathrm{.}93.$ Please evaluate the hedge

decision.

What is the difference between transaction exposure, translation exposure and

economic exposure?

Answer rating: 100% (QA)

Anatoles Hedging Dilemma 1 Optimal Hedging Technique Given the two scenarios and probabilities Anatole faces transaction exposure Heres why Transactio... View the full answer