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problem: Assume we have 50,000,000 euro payable in one year and the one year forward value is euro 0.74. There is also a call available for a premium of euro 0.15 for a one year expiration at a strike of euro 0.75. The following table provides estimates of the future spot rate under different scenarios. find out the dollar cost of the possible hedges and describe which hedge you would use

Scenario

Probability

Expected future spot rate (euro/$)

1

0.30

0.70

2

0.50

0.74

3

0.20

0.77

 

Basic Finance, Finance

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