Astrid is the Treasurer of the Bohemian Rhapsody Music Company (BRM), an Indiana-based accordion manufacturer. She has just made a huge sale to a German Polka Festival company of EUR 2.5M worth of instruments. This money will be paid in EUR in 90 days and she is worried about the FX risk related to this transaction. Given the information below, determine what Astrid’s choices are for managing this risk, be sure to consider all the ways. Use a 360-day year basis, and determine the value on day 90 (when the payment will occur).
|Sale Price 2,500,000|
|Spot EUR/USD 1.0875|
|Forward (90 day)|
|Forecasted Rate EUR/USD 1.0735 in 90 days|
|Cost of Capital 10%|
|Borrow Invest US Rates 4.0%, 2.0%|
|EUR Rates 7.0%, 5.0%|
|Put Option Available @ 1.075 for a 1.25% premium 1.075 1.25%|
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