(1) Desnoes & Geddes (D&G), a Jamaican beer and soft drink manufacturer, is expecting an inflow of 33.45 million US-$ in the next five months. Todays spot exchange rate is 35 Jamaican dollars (J$) per US-$. D&G decides to hedge using options. The J$ interest rate is 23.55%. They contact Citicorp, which offers the following options on the US-$:

- American call option on the US-$ with T=3months, K=35 J$/US$, and price C=3.5 J$/US$

- American put option on the US-$ with T=3months, K=35 J$/US$, and price P=3.2 J$/US$

- American call option on the US-$ with T=6 months, K=35 J$/US$, and price C=3.8 J$/US$

- American put option on the US-$ with T=6 months, K=35 J$/US$, and price P=3.4 J$/US$

Answer the following questions, assuming that these options have no resale value, and ignoring transactions costs.

a) Which option should D&G choose?

b) What is the minimum value in J$ per US-$ that D&G can establish in this hedge (assuming CF occurs at T=5months)?

c) Suppose that five months later (i.e., at the time when D&G receives 33.45 million US-$) the spot exchange rate is 37.66 J$/US-$. What should D&G do? How many J$ per US-$ will they get?

d) Now, suppose that at the time D&G receive the 33.45 million US-$ the spot exchange rate is 30.66 J$/US-$. What should D&G do? How many J$ per US-$ will they get?