A company expects to make a payment of1,000,000to their vendor in Germany in six months.The following information is available:Spot rate today =$1.1800$/Six-month Forward Rate =$1.22$/Six-month Call Option premium,E=$1.18$0.04Six month Put option premium, E=$1.18$0.03Six-month Interest rate in U.S.4%per annumAmount 1,000,000.00a) Should the company be worried about the dollar depreciating or appreciating?b) How should the company hedge the payment using options? Buy calls, sell calls, buy puts or sell puts?c) Show the net payoffs after hedging with your recommended option. Use the following spot prices-$1.02/, $1.18/ and $1.25/ at expiration?d) Show the net payoffs usinga forward hedge. Which hedge is better, forward or option?

Answer rating: 100% (QA)

a To determine whether the company should be worried about the dollar depreciating or appreciating w... View the full answer