Cap Inc., a U.S. manufacturer, purchased computers from a German seller for €4,000,000, payment to be made in 1 year.  .

Today's spot rate of the Euro is $1.38, and the 1 year forward rate is $1.36.  The 1 year annualized interest rates are as follows:

 

                                   Invest rate ($) = 0.85%                Invest Rate (€ ) = 1.06%

                                   Borrow Rate ($) = 1.0%               Borrow Rate (€ ) = 1.21%

 

One-year put options on the Euro are available with an exercise price of $1.30/€ and a premium of $0.05/€.  One-year call options on the Euro are available with an exercise price of $1.30/€ and a premium of $0.07/€.

Would you suggest Cap Inc.'s CFO, Mr. Steve Rogers, to hedge their exposure using a forward hedge or an option hedge?

Answer rating: 100% (QA)

Answer In this scenario a forward hedge is likely the most suitable option for Cap Inc heres why Exp... View the full answer