Financial Risk Manager Part 1
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A portfolio manager at a company is assessing the firm's foreign exchange (FX) exposures as of June 1, 2023, and intends to hedge a net receivable of EUR 5,000,000 that is expected on December 1, 2023. On the review date, the spot rate for the Euro (EUR) is USD 1.07 per EUR 1, and the 6-month forward rate stands at USD 1.10 per EUR 1. The manager is evaluating two hedging strategies:
Which of the following statements most accurately reflects the manager's considerations?
A
ABC would be better off by selling an option contract regardless of how large the change in the FX rate is and in which direction EUR moves relative to USD.
B
ABC would be better off by entering into a forward contract if EUR appreciates against UsD by an amount significantly larger than UsD 0.03 per EUR 1 and the calloption premium ismore than 0.03.
C
ABC would be better off by entering into a forward contract if EUR appreciates against USD by less than USD 0.03 per EUR 1.
D
ABC would be better off by entering into a forward contract if EUR depreciates against USD by an amount significantly larger than USD 0.03 per EUR 1.