Question: ABC is a us company that just bought goods from a French Company for 600 million euros with payment due in 4 months. assume the following:
Spot rate $1.32/Euro
4 month forward rate $1.31/Euro
4 month French interest rate 8% p.a.
4 month US interest rate 6% p.a.
4 month call option on euros at a strike price of $1.29/Euro with a 3% premium
4 month put option on euros at a strike price of $1.35/Euro with a 4 %premium
A. How can ABC hedge this risk?
b. Which alternative would you choose and why?
c. Does the French company have any transaction risk as a result of this deal?
d. what is the breakeven exchange rate between the forward market hedge and your option alternative (the one you used in Part A)?