a$)$ Texeco PLC is a US based MNC that will need $100,000$ in one year. It could obtain a forward

contract to purchase the euros in one year. The one year forward rate is $$1\mathrm{.}20,$ the same rate as currency futures contract on euros. You also learn that the Euro deposit rate is $5\%$ p$.$a and can also borrow US$ at $8\%$ p$.$a The spot today is $$/1\mathrm{.}18.$The company$$s international treasurer is also wary that the forward and money market techniques can backfire when a payables currency depreciates or a receivables currency appreciate over the hedged period.

The treasurer is therefore open to the use of a currency call option that has an exercise price of $$1\mathrm{.}20,$ a

premium of $$0\mathrm{.}03$ and an expiration date of one year from now

Texedo$$s forecast for the spot rate of the $$ at the time payables are due is as follows:

Scenario Due date spot Premium probability

One $$1\mathrm{.}16$ $$0\mathrm{.}0320\%$

Two $1\mathrm{.}220\mathrm{.}0370\%$

Three $1\mathrm{.}240\mathrm{.}0310\%$

Required

You are required to calculate the respective costs for each of the following hedging technics and advise

Texeco$$s international Treasurer accordingly.

i$)$ Forward contract

ii$)$ Money market

iii$)$ Call option $(15$ Marks$)$