Indiana Company expects to receive 5 million euros in one year from exports It can use any one of the following strategies to deal with the exchange rate risk Estimate the dollar cash flows received as a result of using the following strategies a Unhedged strategy b Money market hedge c Option hedg...

Calculation of Forward Rate Spot Rate 110 US Interest Rate 008 Euro Int ...

Indiana Company expects to receive 5 million euros in one year from exports. It can use any

Question:

Indiana Company expects to receive 5 million euros in one year from exports. It can use any one of the following strategies to deal with the risk. Estimate the dollar cash flows received as a result of using the following strategies:
a. Unhedged strategy
b. Money market hedge
c. Option hedge
The spot rate of the euro as of today is $1.10. Interest rate parity exists. Indiana Company uses the forward rate as a predictor of the future spot rate. The annual interest rate in the U.S. is 8% versus an annual interest rate of 5% in the eurozone. Put options on euros are available with an exercise price of $1.11, an expiration date of one year from today, and a premium of $.06 per unit. Estimate the dollar cash flows it will receive as a result of using each strategy. Which hedge is optimal?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...