Operating exposure (II) Tiny Tots Toys of Miami, Florida projects second quarter 2006 sales in Argentina to be 10,000 pesos, and expects the exchange rate to be \($0.5\) per peso (dollar earnings are therefore expected to be \($5,000).\) 

a If the exchange rate unexpectedly changes to \($0.25\) per peso and Tiny Tots has not hedged, what are losses due to “operating exposure”? 

b How could Tiny Tots eliminate its operating exposure? 

c Suppose that Tiny Tots relocates production to Argentina and expects second quarter costs of production and distribution to be 5,000 pesos, leaving a net profit of 5,000 pesos if sales remain constant. Would you recommend that Tiny Tots hedge the entire 10,000 pesos? 

d In either event, what will Tiny Tots’ hedging activity do to the expected profitability in US dollars and in Argentine pesos of Tiny Tots? Explain.