Fresno Corporation
 
 
Amount to hedge E 200,000
Spot Rate $1.50
Forward $1.47
UK Lending Rate 4.5%
UK Borrowing Rate 5%
US Lending Rate 5%
US Borrowing Rate 6%
Exercise Price - call option $1.48
Premium - call option $0.03

 
Probability Spot Rate Forward Money Market Option Unhedge
20% $1.43 ($1.47 * 200,000)
= 294,000
200,000 / 1.045
= 191,387
191,387 * 1.50
= 287,081
287,081 * 1.06
= 304,306
don't exercise
1.43*200K+ 6000 = 292,000
1.43*200,000
= 286,000
70% 1.46 294,000 304,306 don't exercise
1.46*200K+6000 = 298,000
1.46*200,000
= 292,000
10% 1.52 294,000 304,306 exercise
1.48*200K+6000
= 302,000
1.52*200,000
= 304,000
Average 294,000 304,306 297,000 292,000

Don't hedge to get the best result


Gator Corporation
 
 
Amount to hedge E 300,000
Spot Rate $1.50
Forward $1.47
UK Lending Rate 4.5%
UK Borrowing Rate 5%
US Lending Rate 5%
US Borrowing Rate 6%
Exercise Price - call option $1.49
Premium - call option $0.02

 
Probability Spot Rate Forward Money Market Option Unhedge
20% 1.43 1.47 * 300,000
= 441,000
(300K/1.05)*1.5*1.05
= 450,000
447,000 - 6000
= 441,000
1.43 * 300K
= 429,000
70% 1.46 441,000 450,000 447,000 - 6000
= 441,000
1.46 * 300K
= 438,000
10% 1.52 441,000 450,000 1.52*300K-6000
= 450,000
1.52 * 300K
= 456,000
Average 441,000 450,000 441,900 438,000

Use money market to get the largest receivable.