Hedge finance
Suppose we have euro 50,000,000 payable in one year and the one year forward rate is euro 0.74/$. There is also a call available for a premium of $0.15 for a one year expiration at a strike of euro 0.75/ $. The following table provides estimates of the future spot rate under different scenarios. Calculate the dollar cost of the possible hedges and explain which hedge you would use
|
Scenario
|
Probability
|
Expected future spot rate (euro/$)
|
|
1
|
0.30
|
0.70
|
|
2
|
0.50
|
0.74
|
|
3
|
0.20
|
0.77
|