1. Enterprise Rent-a-Car (a U.S. based company) has entered a contract that calls for the company to import cars from koda Auto (a Czech Republic company). The contract will be invoiced in Euros. We will ignore the exchange risk for koda. The amount of the contract is for 7,500,000 payable in one-year. The current U.S. interest rate is 3.50% per annum and the Euro interest rate is 5.30% per annum. The current spot exchange rate is US$1.16/, and the one-year forward rate is US$1.1475/. Further, Enterprise can buy call options at a cost of US$.025/ with an exercise price of US$1.14/ and put options with a cost of US$.0175/ and an exercise price of US$1.15/. Compute the total cost in US$ for Enterprises accounts payable using each of the following techniques (SHOW ALL WORK).

a. Hedge accounts payable with a forward contract b. Hedge accounts payable with a money market strategy c. Hege accounts payable with options d. Which technique should be used and why?

2. Regardless of your solution to question number 1, assume Enterprise will pay $8,475,000 using forward contracts. If the future value cost of the option is $150,000 (for a 7,500,000 amount), at what spot rate (US$/) will the options strategy equal the total cost of the forward hedge? You dont need any other information than what is given in this question so dont refer to question number 1.

3. Based on the information in question 1, what is the implied breakeven forward rate using IRP? In other words, what should be the US$/ forward rate so that buying forward is equal to using a money market hedge?

4. Using the information and your answers in question 1, diagram the total cost comparisons for each of the 3 techniques. You do not need to show the breakeven exchange rates on the horizontal axis but do show the total US$ cost of each on the vertical axis. Be sure to label each axis.