1. This week American Manufacturer entered into a contract with Thai Rubber Co. for a rubber purchase to be delivered in six months. The contractual price is 70 million baht. Daisy Rodriguez, financial manager at American Manufacturer is concerned with adverse changes in the exchange rate. She can hedge the risk in a variety of methods, and market conditions are as follows: The current spot rate is $0.0290/baht, and the 6-month forward exchange rate is $0.0312/baht. Call options on Thai baht with a 6-month expiration date and a strike price of $0.031/baht are currently trading with a call premium of $0.004/baht. Six-month interest rates are 8% in the United States and 2% in Thailand.

a. What is the managers fear with respect to the currency fluctuations?

b. If Ms. Rodriguez uses a forward hedge, what is the guaranteed dollar cost of the transaction?

c. If Ms. Rodriguez uses a money market hedge, what is the guaranteed dollar cost of the transaction?

d. Suppose Ms. Rodriguez chooses the option hedge. When the option matures, the prevailing spot rate is S(baht/$)=34.50. What is the realized cost of the option? Was she better off with her choice?