4. (25 points) MSFT is expected to need 100M Australian dollars (AUD) in 6 months. It would like to hedge the risk of the AUD appreciating by more than 5% in the next 6 months. The current spot exchange rate is $0.66/ AUD. (a) Describe how MSFT can hedge this currency risk by using currency options. You need to specify the type of option (call or put), strike price, expiration and size (the number of AUDs the option is on). (b) Assume that the option used by MSFT in (a) to hedge is of European style. Further assume that the volatility of the exchange rate (\$/AUD) is 15% and the risk free interest rate in Australia is 4% per annum, contimously compounded. Based on the Black-Scholes-Merton model, what is the cost to MSFT to implement the hedge you suggested in (a)? (c) If the risk free interest rate in Australia is higher than 4%, without further computation, would the cost of MSFT's hedge be higher or lower than your answer to (b)? Explain. (d) Suppose in 6 months, the exchange rate increases to \$0.71/AUD. Explain the sense in which the hedge you worked out in (a) helps MSFT in this situation (compared to if the risk is not hedged)