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%

    

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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/$ 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/$

Answer rating: 100% (QA)

1 Remain Unhedged Expected Revenue 4000000 12175025 12330060 11842015 4849500 2 Forward Hedge ... View the full answer