A company expects to make a payment of 1,000,000 to their vendor in Germany in six months.

The following information is available:

Spot rate today = $1.1800 $/

Six-month Forward Rate = $1.22 $/

Six-month Call Option premium, E=$1.18 $0.04

Six month Put option premium, E=$1.18 $0.03

Six-month Interest rate in U.S. 4% per annum

Amount 1,000,000.00

a) Should the company be worried about the dollar depreciation or appreciating?

b) How should the company hedge the payment using options? Buy calls, sell calls, buy puts or sell puts?

c) Show the net payoffs after hedging with the recommended options. Assuming the spot price is

either $1.02/, $1.18/ or $1.25/ at expiration?

d) Show the net payoffs using a forward hedge. Which hedge is better, forward or option?