Cosgrove Manufacturing Company just sold products to a German company for €1,275,000 on terms of net 30 days. Cosgrove is worried that the dollar might strengthen against the euro in the 30 days the credit is outstanding, so it has decided to hedge the receivable with an OTC option hedge. The spot exchange rate today is $1.2300/€ and the 30-day forward rate is $1.2310/€. Both puts and calls are available at a strike price of $1.2310/€ and a 0.25 percent premium. If the U.S. interest rate is 5.4 percent per annum (0.45 percent per month), what is the breakeven future spot rate at which the OTC option costs the same as remaining unhedged?

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The Answer of Cosgrove Manufacturing Company just sold products to a German company for €1,275,000 on terms of net 30 days. Cosgrove is worried that the dollar might strengthen against the euro in the 30 days the credit is outstanding, so it has decided to hedge the receivable with an OTC option hedge. The spot exchange rate today is $1.2300/€ and the 30-day forward rate is $1.2310/€. Both puts and calls are available at a strike price of $1.2310/€ and a 0.25 percent premium. If the U.S. interest rate is 5.4 percent per annum (0.45 percent per month), what is the breakeven future spot rate at which the OTC option costs the same as remaining unhedged?

Cosgrove Manufacturing Company Just Sold Products to a German Company