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Karene Inc. has sold mining tools to Egon Inc. of France for Mexican Peso100,000 with...

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Finance

Karene Inc. has sold mining tools to Egon Inc. of France for Mexican Peso100,000 with payment to be collected in 6 months. The following information is available:

  • Spot exchange rate is PESO1=$0.15
  • Management's forecast of the spot rate 6 months later: it is equally likely that the spot rate 6 months later will be PESO1=$0.12, PESO1=$0.15, or PESO1=$0.20
  • 6-month call option to buy PESO100,000 at exercise price of PESO1=$0.15 and a $0.01 premium per PESO
  • 6-month put option to sell PESO100,000 at exercise price of PESO1=$0.15 and a $0.01 premium per PESO

Suppose Karene Inc. wishes to hedge the dollar value of this transaction using one of the option contracts mentioned above.

(a) Should Karene Inc. use the call option or the put option to hedge this transaction given its transaction need? Explain Briefly, no calculation is need for this part.

(b) calculate the expected (or average) dollars received in 6 months for the option hedge you have chosen in part (a). Calculate the expected (or average) real costs of this hedging strategy.

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