A U.K importer has future payables of DM 20,000,000 in one year. The importer must decide whether to use option or a money market to hedge this position. The following information is available

Spot rate	0.74 =DM1
One year call option
Exercise Price	0.76= DM1
Premium	0.04 per DM
One year Put Option
Exercise Price	0.77 =DM
Premium	0.02 per DM
Sterling Deposit Rate	8% Per Annum
Sterling Borrowing Rate	9% Per Annum
DM Deposit Rate	6% Per Annum
DM Borrowing Rate	7% Per Annum

Forecast one-spot Rate	0.70	0.77	0.70
Probability	25%	55%	20%

Required: Assume that the importers objective is to minimize the sterling value of DM payables.

Which of the hedging instruments would you recommend? Verify your answer by estimating

the sterling cost for each type of hedge. Compare cost of hedging and non-hedging