Posted: September 22nd, 2016

You have bid for a possible export order that would provide a cash inflow of ?1 million in six months.

You have bid for a possible export order that would provide a cash inflow of ?1 million in six months. The spot exchange rate is $1.2375 = ?1 and the six-month forward rate is $1.2318 = ?1. There are two sources of uncertainty: (1) the euro could appreciate or depreciate and (2) you may or may not receive the export order. Illustrate in each case the final payoffs if (a) you sell one million euros forward, and (b) you buy a six-month option to sell euros with an exercise price of $1.2318/?.