## (Solved) UCD (U. based MNC) will receive 500,000 euros in one year. The spot exchange rate today is \$1.30 per euro.

UCD (U.S. based MNC) willÂ receiveÂ 500,000 euros in one year.Â TheÂ spot exchange rate todayÂ is \$1.30 per euro. It observes that

1. TheÂ one-year interest rate for eurosÂ is 5%, and theÂ one-year interest rate for U.S. dollarsÂ is 2%.
2. In theÂ option market, there isÂ one-year call option or put option available.Â Both options have the same exercise price of \$1.28 per euro, and a premium of \$0.02 per euro.Â
3. In theÂ forward market, theÂ one-year forward rateÂ exhibits aÂ 2% discount from the current spot exchange rate.

How should UCD utilize theÂ forward marketÂ to hedge the exchange rate risk for its future receivables?Â And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.) (Points : 3.85)

Â Â Â Â Â Â BuyÂ a one-year forward contractÂ for the amount of 500,000 eurosÂ at the forward rate of \$1.30.Â One year later, UCD will fulfill its obligation and receives the amount of \$650,000.

Â Â Â Â Â Â SellÂ a one-year forward contractÂ for the amount of 500,000 eurosÂ at the forward rate of \$1.30. One year later, UCD will fulfill its obligation and receives the amount of \$650,000.

Â Â Â Â Â Â SellÂ a one-year forward contractÂ for the amount of 500,000 eurosÂ at the forward rate of \$1.274. One year later, UCD will fulfill its obligation and receives the amount of \$637,000.

Â Â Â Â Â Â BuyÂ a one-year forward contractÂ for the amount of 500,000 eurosÂ at the forward rate of \$1.274. One year later, UCD will fulfill its obligation and receives the amount of \$637,000.

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