Dundr, Inc. an American firm, has receiveded an order from a Japanese firm for machinery priced at Yen100,000,000. This amount will be received by Dundr in three months. The following additional information is available (in addition to ft.com exchange rate quotes for April 9)
Compare the following alternatives with respect to $s to be received in 3 months and risk:
a. Remain Unhedged
b. Forward market hedge
c. Money market hedge - all relevant alternatives including comparison to the forward market hedge.
d. Options market hedge - worst case and if the spot rate in 3 months is Yen116/$.
Please see the attached file.
For option hedge to be better than forward hedge, the future $ should cost less than 116.2204 Yen
For option hedge to be better than MM hedge, the future $ should cost less ...
This solution compares financing alternatives given machinery price