Burgess, a U. S.- based MNC, has receivables of EUR 10,000 in 30 days. Spot EURU
ID: 2723739 • Letter: B
Question
Burgess, a U. S.- based MNC, has receivables of EUR 10,000 in 30 days. Spot EURUSD equals 1.23. The firm’s economist forecasts that the EURUSD could end the period with a value of either 1.2000 (probability of 45 percent) or 1.2750 (55 percent). The firm is concerned about the resulting currency risk. It has also assessed some hedging alternatives. Forward contracts of 30- day EURUSD are traded at 1.2250. The 30- day interest rates (actual/ 360) in the United States and Europe are 2 percent and 2.5 percent, respectively. Put options with 30- day expiration and a strike price of USD 1.2250 are available for a premium of USD 0.015. What is the expected cash flow (and the corresponding standard deviation) if company uses forward hedge? (use $x,xxx and $x,xxx)
Explanation / Answer
Solution:
If uses forward contract the expected cash flow would be = forward contract exchange rate * EURO amount no matter what ever the exchange rate be after 30 days
hence = 1.2250*10000 = $12250 will the cash expected if forward hedge is used.
Thank you.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.