Your company produces beach toys for the Cayman islands. The invoice for the upcoming delivery will be in Cayman Islands Dollar (KYD), which currently trade at 1.1392€. The payment to be received is 403000 KYD in 110 days. You are thinking about hedging the exposure. The following options are available: put options, forward contracts, or a money market hedge. Of course, leaving the exposure unhedged is also a possibility. Interest is calculated with 360 days p.a.
The probability distribution of forecasted exchange rates is available as well.
Current spot rate (KYDEUR) € 1.1392 Forward rate for 110 days 1.146 Put option premium € 0.0583 Put option exercise price €1.1268
Annualized interest rates KYD borrow 0.0255 KYD lend 0.019 EUR borrow 0.0347 EUR lend 0.0325 Forecasts Probability KYDEUR 0.08 € 0.7747 0.10 € 0.8658 0.13 € 1.0105 0.44 € 1.1722 0.13 € 1.3648 0.12 € 1.4297
Please calculate the expected amount that you will receive in € in 110 days for each of the possible alternatives.
If you were risk neutral, which alternative would you choose? Please round all answers to two decimal points,e.g., if your answer is 1234.5678, please put 1234.57
The expected amount (in €) you will receive in 110 days is... Unhedged: . Money Market hedge: Forward: Put Option: If you were risk-neutral, you would choose:
