Hedging decision Indiana Co

Subject:FinancePrice:3.86 Bought11

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Hedging decision Indiana Co. expects to receive 5 million Australian dollars in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the Australian dollar as of today is US$0.69. Interest rate parity exists. Indiana Co. uses the forward rate as a predictor of the ?iture spot rate. The annual interest rate in the United States is 2.25 per cent versus an annual interest rate of l per cent in Australia. Put options on Australian dollars are available with an exercise price of US$0.7000, an expiration date of one year from today, and a premium of US$0.05 per unit. Estimate the US dollar cash ?ows that Indiana Co. will receive as a result of using each of the following strategies: a unhedged strategy h money market hedge 0 put options hedge. Which hedge is optimal?