FIN4802 ASSIGNMENT 1 2026
DUE 21 MAY 2026
QUESTION 1
1. Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1 year.
The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on
Euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit.
Assume the following money market rates:
(a) Determine the dollar cash flows to be received if Jones uses a money market
hedge (Assume Jones does not have any cash on hand)
Receivable: €1,000,000 in 1 year.
Money market rates: Eurozone borrowing = 6%; US deposit = 8%.
Spot rate: $1.20/€.
Present value of the receivable in euros
PV€ = 1,000,0001+0.06 = 1,000,0001.06 = €943,396.23PV€ = 1+0.061,000,000
=1.061,000,000 = €943,396.23
Convert euros to dollars at spot rate
$proceeds= 943,396.23×1.20=$1,132,075.48$proceeds=943,396.23×1.20 =
$1,132,075.48
Invest dollars at US deposit rate (8%)
DUE 21 MAY 2026
QUESTION 1
1. Assume that Jones Corp. (a U.S. firm) expects to receive 1 million Euros in 1 year.
The spot rate of the Euro is $1.20. The 1-year forward rate of the Euro is $1.21. Jones
expects the spot rate of the Euro to be $1.22 in 1 year. Assume that 1-year options on
Euros are available, with an exercise price of $1.23 and a premium of $0.04 per unit.
Assume the following money market rates:
(a) Determine the dollar cash flows to be received if Jones uses a money market
hedge (Assume Jones does not have any cash on hand)
Receivable: €1,000,000 in 1 year.
Money market rates: Eurozone borrowing = 6%; US deposit = 8%.
Spot rate: $1.20/€.
Present value of the receivable in euros
PV€ = 1,000,0001+0.06 = 1,000,0001.06 = €943,396.23PV€ = 1+0.061,000,000
=1.061,000,000 = €943,396.23
Convert euros to dollars at spot rate
$proceeds= 943,396.23×1.20=$1,132,075.48$proceeds=943,396.23×1.20 =
$1,132,075.48
Invest dollars at US deposit rate (8%)
