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ABC Ltd. wishes to hedge a €4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment is due in 3 months. ABC's Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative.

Citibank has offered ABC the following quotes:

Assumptions Values

Account receivable due in 3 months, in euros (€) € 4,000,000.00

Spot rate ($/€) 1.200

3-month forward rate ($/€) 1.218

3-month euro interest rate 4.20%

3-month put option on euros:

Strike rate ($/€) 1.200

Premium, percent per year 3.40%

Tek's weighted average cost of capital 9.80%

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M944718

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