What actions, if any, should you take?

Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm.  The finance manager expects the spot price   of the € to remain stable at the current rate of $1.60/€.  But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low         as $1.50/€.  Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures.  Six months Call and Put options with an exercise price of $1.60/€ are available.  The Call sells for $.08/€ and the Put sells for $.04/€.  A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment?  Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used?  assume…

IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is #105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent per annum in the United States and 7 percent per annum in Japan. The management of IBM decided to use a money market hedge to deal with this yen account payable. a. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation. b. Conduct a cash flow analysis of the money market hedge.

The treasurer of a major U.S. firm has $38 million to invest for three months. The interest rate in the United States is .55 percent per month. The interest rate in Great Britain is .59 percent per month. The spot exchange rate is £.76, and the three-month forward rate is £77. Ignore transaction costs. a. If the treasurer invested the company's funds in the U.S., how much would the investment be worth after three months? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. b. If the treasurer invested the company's funds in Great Britain, how much would the investment be worth after three months in U.S. dollars? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. a. U.S. investment b. Great Britain investment