International Financial Management 6th Edition by Sanjiv Eun, Cheol Resnick, Bruce Sabherwal

Exercise 5

In Example 10.2, a forward contract was used to establish a derivatives "hedge" to protect Centralia from a translation loss if the euro depreciated from €1.1000/$1.00 to €1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of €1.1393/$1.00 (or $0.8777/€1.00) can be purchased for $0.0088 per euro. Show how the potential translation loss can be "hedged" with an option contract.