AID22096: XYZ ltd. has imported raw material of Euro 14 million from Germany with the credit of 30 days. The finance officer of XYZ ltd. wants to hedge this transaction for foreign exchange risk exposure. The prevailing interest and exchange rates in the markets are:
Spot Rate: Euro 80.49/ INR
Forward Rate: Euro 80.79/ INR
30 day Put Option on INR EURO 0.012/ Euro at 1% premium
30-day Call option on INR EURO 0.024/ Euro at 1 % premium
EURO interest rate: 7%
INR interest rate: 14%
Based on the above data, answer the following questions:
a. Explain different hedging options available to XYZ ltd?
b. What is the hedged cost of XYZ ltd payable using forward market hedge, put option hedge and money market hedge?
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