Lee Inc. is an American firm that will need to make a payment of 889,000 Australian dollars in 90 days. Currently, the spot exchange rate is USD 0.9377/AUD. The company wants to hedge the transaction exposure but also wants to pay lesser if the exchange rate is in their favour. The local bank forecasts the future exchange rate in 90 days at USD 1.0974/AUD and offers several derivatives: (1) a 90-day forward contract with an exchange rate of USD 1.0738/AUD, (2) a 90-day European call option on Australian dollar with a strike price of USD 1.0718 and a premium of USD 0.06, and (3) a 90-day European put option on Australian dollar with a strike price of USD 1.0337 and a premium of USD 0.11. Assuming that the future spot rate would be as forecasted, determine the company’s net payment in USD if it acts rationally.

Answer rating: 100% (QA)

To determine the companys net payment in USD if it acts rationally lets analyze each hedging option ... View the full answer