Yoyo, a german company expects to pay US$10 million to a supplier in US. It is now December and the payment is due in March. The current spot rate is 1.2100. The company wants to use currency options to hedge the exposure. March currency put options are available and are for 125,000 euros, have a strike price of $1.2200 and the tick size is $0.0001. The cost of the option contract is 2.75 US cents per euro. Assuming that there is no basis, (i) Devise a hedging strategy for Yoyo using currency options. (ii) Advise on the action to be taken by Yoyo and the outcome in case the spot rate in March when the dollars must be paid is: (a) $1.2500 = €1  (b) $1.1800 = €1

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter5: Currency Derivatives
Section: Chapter Questions
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Yoyo, a german company expects to pay US$10 million to a supplier in US. It is now December and the payment is due in March. The current spot rate is 1.2100. The company wants to use currency options to hedge the exposure. March currency put options are available and are for 125,000 euros, have a strike price of $1.2200 and the tick size is $0.0001. The cost of the option contract is 2.75 US cents per euro.
Assuming that there is no basis,
(i) Devise a hedging strategy for Yoyo using currency options.
(ii) Advise on the action to be taken by Yoyo and the outcome in case the spot rate in March when the dollars must be paid is:
(a) $1.2500 = €1 
(b) $1.1800 = €1

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