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%