TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEK’s Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the following quotes:

Spot rate	USD1.2000/EUR
3 month forward rate	USD1.2180/EUR
Three month euro interest rate	4.2% per year
3 month put option on euros at strike price of USD1.0800/EUR	3.4%
TEK’s weighted average cost of capital	9.8%

What are the costs of its payment hedging alternatives if it uses the forward and options markets?

Answer rating: 100% (QA)

Let us see the hedging alternatives which he has a If he remains unhedged In 3 mont... View the full answer