3 A Dutch manufacturer sells 120,000 prefabricated components to a company in Edinburgh, Scotland. Each component sells for 70. Payments are due in six months. The effective semi-annual interest rate for the euro is assumed to be 1.1%, and the effective semi-annual interest for the UK assumed to be 2.3%. The current spot exchange rate is 1.19 (for 1 ). 3.1 To hedge his exposure, the Dutch manufacturer enters into a forward contract. Each contract has a size of 100,000. The six-month forward rate is at 1.18. 3.1.1 Does the manufacturer enter a long or short position? Explain. 3.1.2 What are the hedged earnings for the Dutch manufacturer if the price at maturity equals 1.21 ? What are the hedged earnings if the price at maturity equals 1.13 ? 3.1.3 How much does the Dutch manufacturer gain or lose when the price at maturity equals 1.21 ? How much does the investor gain or lose when the price at maturity equals 1.13? 3.2 To hedge his exposure, the manufacturer buys option contracts with a strike price of 1 16. Each contract has a size of 10,000. The premium per contract equals 301. 3.2.1 Does the Dutch manufacturer buy call or put options? Explain. 3.2.2 What are the hedged earnings for the Dutch manufacturer if the price at maturity equals 1.21 ? What are the hedged earnings if the price at maturity equals 1.13 ? 3.2.3 How much does the Dutch manufacturer gain or lose when the price at maturity equals 1.21 ? How much does the investor gain or lose when the price at maturity equals 1.13