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Compare the total usd cash out?ow

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You work for a U.S. firm that imports from Italy and expects to pay 200,000 euros a year from now. The one-year U.S. interest rate is 2% when investing funds and 5% when borrowing funds. The one-year Italian interest rate is 3% when investing funds and 6% when borrowing funds. The current spot rate of the euro is $1.20. You are certain that the euro spot rate a year from now will be $1.25. There are both Call and Put options available on the euro with a 1- year expin and an exercise price of $1.20. The call option's premium is $0.02 as is the put option's premium. If your firm decides to hedge this payable, is it better off using a money market hedge or a currency option hedge (i.e., compare the total USD cash out?ow from implementing each strategy)?

Reference no: EM133069606

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