Outline the firms best course of action calculate rank and

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Australian firm Transportation Ltd. (TL) has just signed a contract to sell rail cars to Italy for €2,500,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than AUD, TL is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information:

  • The spot exchange rate is EUR/AUD 1.1740
  • The six month forward rate is EUR/AUD1.1480
  • December put options for EUR, exercise price EUR/AUD1.1800, premium is AUD0.027 per EUR
  • December call options for EUR, exercise price EUR/AUD1.1800, premium is AUD0.031 per EUR
  • TL's forecast for 6-month spot rate is EUR/AUD1.1900
  • The budget rate, or the lowest acceptable price, for this project, is AUD 2.85 million.

Outline the firm's best course of action. Calculate, rank and briefly explain your choices based on both quantitative and qualitative factors that the firm should take into account (ie: not just the $ cost).

Reference no: EM13617227

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