1. A U.S. fund manager who bought 100 million in Australian dollar (A$) bonds when the A$ was at US$/ A$0. 72 is worried that the A$ might depreciate because of disappointing Australian economic performance. He decides to set A$/$0.72 as the maximum downside loss that he wants to risk from the current level of A$/$0.7850 (spot). The fund manager doesn't mind foregoing profit opportunities from a further upward move in the A$ and is uncertain how long he will hold the bonds. He sets the year end as his time horizon. By utilizing Table I (Rows 4 and 5) data, which hedging strategy should the fund manager adopt?

2. A German company is bidding on a contract in the U.K. The bid is estimated at 40 million and they anticipate a profit margin of 30 percent on the project. Hence, they will need to repatriate 12 million in profit, but they worry that the new U.K. economic trends could hurt the pound sterling exchange rate. Determine how the German company could hedge their potential exposure. Utilize Table I (Row 6) for data.

Row 1234567 7 Row 1234567 Currency Exchange Rates Spot 1.67 1.67 1.7 0.785 0.785 2.8921 120.0 Premium per FC 0.0164 0.0164 0.0176 0.007211 0.007234 0.0161 0.000127 Contract DM/$ DDM/S $/STG A$/$ A$/$ DM/STG YEN/S Currency Options Quotations Forward U.S. Maturity 272 272 60 195 195 14 731 1.6725 1.6725 1.6818 0.76 0.76 2.8845 116.5 Interest Rate 8.3 8.3 8.2 8.25 8.25 7.9091 8.7 Premium per Dollar 0.0466 0.0452 0.006105 0.0128 0.0115 0.001936 1.9595 Foreign 8.5106 8.5106 14.8657 14.7892 14.7892 14.8811 7.1318 Delta 0.3387 0,423 0.388 0.206 0.494 0.188 Option Type PUT CALL CALL PUT CALL PUT PUT Hedging Ratio Gamma 0.039 0.041 0.098 0.037 0.281 0.019 Strike Price 1.7 1.647 1.7 0.72 0.8025 2.8845 128.15 Theta 0.00003 0.00003 0.00008 0.00007 0.00085 N.A. Row 1234567 7 Row 1234567 Currency Exchange Rates Spot 1.67 1.67 1.7 0.785 0.785 2.8921 120.0 Premium per FC 0.0164 0.0164 0.0176 0.007211 0.007234 0.0161 0.000127 Contract DM/$ DDM/S $/STG A$/$ A$/$ DM/STG YEN/S Currency Options Quotations Forward U.S. Maturity 272 272 60 195 195 14 731 1.6725 1.6725 1.6818 0.76 0.76 2.8845 116.5 Interest Rate 8.3 8.3 8.2 8.25 8.25 7.9091 8.7 Premium per Dollar 0.0466 0.0452 0.006105 0.0128 0.0115 0.001936 1.9595 Foreign 8.5106 8.5106 14.8657 14.7892 14.7892 14.8811 7.1318 Delta 0.3387 0,423 0.388 0.206 0.494 0.188 Option Type PUT CALL CALL PUT CALL PUT PUT Hedging Ratio Gamma 0.039 0.041 0.098 0.037 0.281 0.019 Strike Price 1.7 1.647 1.7 0.72 0.8025 2.8845 128.15 Theta 0.00003 0.00003 0.00008 0.00007 0.00085 N.A