Complete Hedging Problem using following given info: 

Value of Tek's receivables = €4,000,000

Payable due in = 90 days 

Given: ▪ Spot rate is $1.2000/€ 

▪ 3-month forward rate is $1.2180/€

▪ Tek's cost of capital is 9.8% 

▪ Tek's short-term investment rate is 5.25% p. a. 

▪ 3-month euro borrowing rate is 4.2% p.a. 

▪ 3- month euro put option strike price = $1.2200/€ 

▪ Option premium = 3.4% 

▪ The expected spot rate can be estimated from the following information:

Possible Spot Rate in 90 days    Probability 

$1.2175/€                                         25%

$1.2330/€                                        60%

$1.1842/€                                          15%

    

1. Remain Unhedged - Convert euro to dollars in 3 months. Amount of yen payable = 4,000,000.00 Expected spot rate $1.2175 $1.2330 $1.1842 $ Revenue Probability Expected Spot rate 2. Forward Hedge - sell euro forward 3-months to lock in dollar revenue. Amount of yen payable = 4,000,000 Forward rate = 1.2180/$