a. Assume that DD Construction Inc (a UK firm) expect to receive 1 million euros in...

   

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a. Assume that DD Construction Inc (a UK firm) expect to receive 1 million euros in one year. The existing spot rate for euro is 1.20. The one year forward rate for the euro is 1.21. DD Construction expects the spot rate of euro to be 1.22 in one year. Assume a one-year put options on euros are available with an exercise price of 1.23 and a premium of 0.04 per unit. Also assume the following money market rates: UK Eurozone Lending rate 8.2 5.6 Borrowing rate 9.5 6.2 a. Determine the cash flow in pound to be received if DD Construction uses a money market hedge. b. Determine the cash flow in pound to be received if DD Construction uses a put option hedge. c. If DD Construction is using leading and lagging strategy what would be the optimal strategy if euro is expected to (i) appreciate in value, (ii) depreciate in value, and (iii) neither appreciate nor depreciate. a. Assume that DD Construction Inc (a UK firm) expect to receive 1 million euros in one year. The existing spot rate for euro is 1.20. The one year forward rate for the euro is 1.21. DD Construction expects the spot rate of euro to be 1.22 in one year. Assume a one-year put options on euros are available with an exercise price of 1.23 and a premium of 0.04 per unit. Also assume the following money market rates: UK Eurozone Lending rate 8.2 5.6 Borrowing rate 9.5 6.2 a. Determine the cash flow in pound to be received if DD Construction uses a money market hedge. b. Determine the cash flow in pound to be received if DD Construction uses a put option hedge. c. If DD Construction is using leading and lagging strategy what would be the optimal strategy if euro is expected to (i) appreciate in value, (ii) depreciate in value, and (iii) neither appreciate nor depreciate.