Texeco PLC is a US based MNC that will need 100,000 in one year. It could obtain a forward contract to purchase the euros in one year. The one year forward rate is $1.20, the same rate as currency futures contract on euros. You also learn that the Euro deposit rate is 5% p.a and can also borrow US$ at 8% p.a The spot today is $/1.18. The company's international treasurer is also wary that the forward and money market techniques can backfire when a payables currency depreciates or a receivables currency appreciate over the hedged period. The treasurer is therefore open to the use of a currency call option that has an exercise price of $1.20, a premium of $0.03 and an expiration date of one year from now Texedo's forecast for the spot rate of the at the time payables are due is as follows:

Scenario Due date spot Premium probability

One $1.16 $0.03 20%

Two 1.22 0.03 70%

Three 1.24 0.03 10%

Required You are required to calculate the respective costs for each of the following hedging technics and advise Texeco's international Treasurer accordingly.

1. Forward contract
2. Money market
3. Call option
4. 4 A no hedge situation.