# solution

Assume the following interest rate and exchange rate quotes. You can borrow \$1,000,000 or its yen equivalent Â¥100,000,000: Home currency: \$ Foreign currency: Â¥ Spot exchange rate: Â¥100/\$ 1-year forward rate: Â¥ 98/\$ 1-year \$ interest rate: 1.50% 1-year Â¥ interest rate: 0.50%

Which of the following statement is NOT true about the option market hedge? (2 points) The maximum total dollar payment is \$1,172,750. When future spot rate is greater than strike price, total dollar payment does not change with future spot rate. When future spot rate is less than strike price, total dollar payment decreases with future spot rate. There is a maximum of the total dollar payment. How should Coca-Cola hedge in the money market? (2 points) Borrow â‚¬ and sell â‚¬ for \$ today. Borrow \$ and sell \$ for â‚¬ today. What will the dollar payment be in one year if Coca-Cola the money market hedge? (2 points) \$1,089,109 \$1,122,000 \$1,110,891 It depends on future spot rate. Which of the following statement is NOT true about the money market hedge? (2 points) All else being equal, the higher the euro interest rate, the lower the dollar payment in one year. All else being equal, the higher the dollar interest rate, the higher the dollar payment in one year. The dollar payment in one year depends on the future spot rate. All else being equal, the higher the euro spot rate, the higher the dollar payment in one year. What is the breakeven future spot rate between forward market hedge and option market hedge (round to four decimal places)? (2 points) \$1.1928/â‚¬ \$1.2300/â‚¬ \$1.1300/â‚¬ \$1.1673/â‚¬ If you believe the spot rate in one year will be \$1.10/euro, what do you recommend Coca-Cola choose? (2 points) Choose option market hedge Choose forward market hedge

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