ASIS Company provides the following information and you need to make one recommendation to CEO regarding the AR and AP.
Hedging Transaction Exposure
Information Set
Borrowing Rate Deposit Rate
Euro 8% 3%
USA 9% 4%
• Current Spot Rate: $1.25
• Forward Rate: $1.25
• Put Option (X= 1.26. P= $.01) Call Option (X= 1.25, P= $.01)
Future Spot Probability
1.15 10%
1.20 20%
1.25 20%
1.26 20%
1.27 20%
1.30 10%
Company has a receivable in euro for the amount of 11,000,000 euro in one year. You are trying to hedge this receivable using the techniques. Answer the following questions using the information set given above.
1. What is the probability that forward hedge outperforms the Money Market Hedge?
Answer:_________________________
2. What is the probability that forward hedge outperforms no hedge?
a. Answer:________________________
3. What is the probability that Money market hedge outperform the option hedge?
a. Answer: ____________________
4. What is your recommendation to this receivable? Justify. (I want the expected value of all)
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