6. (Ch. 5) Option Hedge. It is October 2021. Quality Imports, a U.S.-based importer, has an Australian dollar (AUD) 500 million payable due in March 2022. Quality Imports decides to use options to hedge foreign exchange risk. The market quotes for the available options with March maturity are: X (strike rate in AUDUSD) AUD Calls /USD Puts AUD Puts/USD Calls 0.70 2.98 0.29 0.72 1.62 1.75 0.75 0.17 4.15 where X represents the strike exchange rate in AUDUSD, the premiums are expressed in USD cents (i.e., 1.75 equals USD 0.0175), and the option's underlying exchange rate is based on the value of one unit of the AUD in terms of the USD (or AUDUSD). Today, the spot exchange rate for AUDUSD is 0.72. a. If this company wants to hedge by buying an out-of-the-money option, which type of option (AUD Calls/USD Puts or AUD Puts/USD Calls) with what strike rate should this company purchase? (5 points) Calculate the premium paid or received from hedging using options. (3 points) Describe the net cash flows (in USD) in March for the overall position of this company by analyzing the following two scenarios: the options are exercised, and the options are not exercised at expiration. 6 points) b. Suppose this company can trade AUD forward contracts today at Fx March( AUDUSD) = 0.73. Calculate the cash flows (in USD) in March for this company under this forward contract. (5 points) c. What are the pros and cons of the forward contract relative to the options alternative? (3 points)