A Hong Kong exporter expects to receive 82,000 Euros in two years. To hedge the risk of the foreign currency, the exporter considers using forward on Euro. One forward contract is for delivery of 10,000 Euros. Only integer number of contracts can be used (that is, the exporter cannot have a fraction of the contract). (a) To hedge the risk, what position in the forward should the exporter take? How many forward contracts? [6 points]

(b) Currently, the exchange rate between the Hong Kong Dollar and the Euro is 8.75 HKD/Euro. The risk-free rate in Hong Kong is 2% per annum, while the Euro's risk-free rate is 1.5% per annum. What is the 2-year forward exchange rate? [6 points]

(c) Suppose that the exporter takes the forward position found in (a) at the forward price of (b). What is the standard deviation of the total revenue (including the original payment in Euro and the forward payoff)? The standard deviation of the spot exchange rate is 0.17. [6 points]