Hippity Hops is a Slovakian-based grower of high-quality hops that uses the euro as its functional currency. Czech brewer Pilsner Urquel promises to pay Hippity Hops CZK40 million in one year. The sale is invoiced in Czech korunas (CZK). The spot and 1-year forward rates between the euro and the koruna are

. (The koruna is the foreign currency, so you might prefer to restate this as a euros-per-koruna rate.)

a. Identify Hippity Hops' expected cash flow in korunas on a timeline.

b. Draw a risk profile for Hippity Hops in euros per koruna, both in levels and percentage changes in the value of the koruna.

c. If the actual spot rate of exchange in one year is CZK25/€ (or €0.04/CZK), how much gain or loss will Hippity Hops have if it does not hedge its currency exposure? Use the forward rate as the starting point in calculating this gain or loss.

d. Form a forward market hedge based on the forward exchange rate. Show how the hedge eliminates Hippity Hop's currency exposure by identifying the forward contract's cash inflows and outflows on a timeline. Construct a payoff profile that combines the exposures of the underlying position and the forward contract.

e. Form a currency option hedge by purchasing a CZK put option (i.e., an option to sell CZK) at an exercise price of €0.030/CZK at an option premium of €0.005/CZK. Show how the hedge changes Hippity Hop's currency exposure by constructing a payoff profile that combines the exposures of the underlying position and the option hedge.