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Consider a US based company that exports goods to Spain. The US Company expects to receive a 300 million euro payment in one year. Because the payment will be in euros the US Company wants to hedge against a decline in the value of the euro over the next 12 months. Considering the following data: Spot: 1.12-1.14 $/ Fwd: 1.15-1.17 $/ E(St): 1.19-1.21 $/ Int rate $: 3.00% -4.00% Int rate : 1.00 % -2.00% Options on : Contract size: 62500 Exercise (Strike) Price: 1.20 $/ Call opt Price: 1250 $ per contract Put opt Price: 3125 $ per contract a. Calculate fwd hedging. Explain if you buy or sell and all the steps. b. Calculate M-M hedging, explaining all carefully. Is it better fwd or MM hedging? C. Is interest rate Parity holding? Explain. Calculate Fwd rate that gives you same result than MM hedge d. Calculate option hedging, explaining carefully which option will be choosed, if you buy or sell it (the option), and results obtained with this coverage. e. At what future spot Exchange rate will you be indifferent between the chosen hedge (fwd or MM) and option Market hedge? f. Considering the expected Exchange rate explain clearly your recommendation Calculate expected result if you do not hedge, explaining clearly cost of hedging g. Consider a US based company that exports goods to Spain. The US Company expects to receive a 300 million euro payment in one year. Because the payment will be in euros the US Company wants to hedge against a decline in the value of the euro over the next 12 months. Considering the following data: Spot: 1.12-1.14 $/ Fwd: 1.15-1.17 $/ E(St): 1.19-1.21 $/ Int rate $: 3.00% -4.00% Int rate : 1.00 % -2.00% Options on : Contract size: 62500 Exercise (Strike) Price: 1.20 $/ Call opt Price: 1250 $ per contract Put opt Price: 3125 $ per contract a. Calculate fwd hedging. Explain if you buy or sell and all the steps. b. Calculate M-M hedging, explaining all carefully. Is it better fwd or MM hedging? C. Is interest rate Parity holding? Explain. Calculate Fwd rate that gives you same result than MM hedge d. Calculate option hedging, explaining carefully which option will be choosed, if you buy or sell it (the option), and results obtained with this coverage. e. At what future spot Exchange rate will you be indifferent between the chosen hedge (fwd or MM) and option Market hedge? f. Considering the expected Exchange rate explain clearly your recommendation Calculate expected result if you do not hedge, explaining clearly cost of hedging g

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