JCrew Co. is expecting to receive 550,000 euros in one year. JCrew expects the spot rate of euro to be $0.65 in a year, so it decides to avoid exchange rate risk by hedging its receivables.
The spot rate of the euro is quoted at $0.71. The strike price of put and call options are $0.69 and $0.66 respectively.
The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium.
Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars JCrew Co. will receive under this strategy.