Texas Traders (TT for short) is a US based firm that has entered into a deal to sell Texas beer to an importer in South Korea.

The terms of the deal are as follows:

Value of the deal: 200 Billion Won

Payment terms (note: payment is to be made in Korean Won):

10% down payment, with the rest split equally over 75 days and 240 days.

Exchange rates: Spot (Bid, Ask): 0.00087 – 0.00089

75-day Forward Rates: 0.00087 – 0.00092

240-day Forward Rates: 0.00070 – 0.00083

Borrowing, Lending rates in Korean Won: 12%, 10% [75 days], and 14%, 11% [240 days]

Put and Call Options are available:

CALL: Strike price: 0.00080, option premium = 6%, American, expires in 240 days.

PUT: Strike price: 0.00084, option premium = 18%, American, expires in 240 days.

TT cost of capital: 10%

Management is wondering on the best hedging method for TT. Can you help them?

Answer rating: 100% (QA)

HEDGING Won 200 billion RECEIVABLE FORWARD HEDGE Down Payment10200 billion20 billion Won Spot rate for Selling Won 000087Won A Amount to be received n... View the full answer