Your company produces beach toys for the Cayman islands. The invoice for the upcoming delivery will...
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Your company produces beach toys for the Cayman islands. The invoice for the upcoming delivery will be in Cayman Islands Dollar (KYD), which currently trade at 1.1243€. The payment to be received is 657000 KYD in 110 days. You are thinking about hedging the exposure. The following options are available: put options, forward contracts, or a money market hedge. Of course, leaving the exposure unhedged is also a possibility. Interest is calculated with 360 days p.a. The probability distribution of forecasted exchange rates is available as well. Current spot rate (KYDEUR) Forward rate for 110 days Put option premium (per KYD) Put option exercise price Annualized interest rates € 1.1243 1.1355 € 0.0516 € 1.0837 KYD borrow KYD lend EUR borrow EUR lend Forecasts Probability 0.05 0.06 0.07 0.64 0.0231 0.0214 0.0261 0.0239 KYDEUR € 0.6959 € 0.841 € 0.9152 € 1.0681 0.10 0.08 € 1.257 € 1.3863 Please calculate the expected amount (note: not the expected cost of hedging) that you will receive in € in 110 days for each of the possible alternatives. If you were risk neutral, which alternative would you choose?
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