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Tek, a US firm has an account payable (AP) resulting from its purchase of electronic...

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Finance

Tek, a US firm has an account payable (AP) resulting from its purchase of electronic equipment from a German firm. The amount of the receivable is 500,000 and it is due in six months. Teck wants to hedge the AP against currency risk. Citibank has offered Teck the following quotes:

Spot rate $1.1520/

3-month forward rate $1.1620/

Euro interest rate 2.4%

Premium on 6-month put option on euros at

a strike price of $1.1650 $0.01

Premium on 6-month call option on euros at

a strike price of $1.1650 $0.015

U.S. interest rate 3.6%

Teks 6-month forecast for euro $1.1500/

a. Calculate the locked-in value of this AP if Tek chooses (1) forward market hedge, (2) money market hedge, (3) options market hedge, and (4) remains unhedged.

b. What are the risks (uncertainty) of each alternative?

c. Which alternative should Tek choose if it prefers to play it safe?

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