Question 21.FSE.7: Assume that Jarret Co. (a U.S. firm) expects to receive 1 mi...

International Financial Management

Assume that Jarret Co. (a U.S. firm) expects to receive 1 million euros in one year. The existing spot rate of the euro is $1.20. The one-year forward rate of the euro is $1.21. Jarret expects the spot rate of the euro to be $1.22 in one year.
Assume that one-year put options on euros are available, with an exercise price of $1.23 and a premium of $.04 per unit. Assume the following money market rates:

	United States	Euro Zone
Deposit rate	8%	5%
Borrowing rate	9%	6%

a. Determine the dollar cash flows to be received if Jarret uses a money market hedge. (Assume Jarret does not have any cash on hand when answering this question.)
b. Determine the dollar cash flows to be received if Jarret uses a put option hedge.

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