A US firm bought textiles for $1,000,000$ from Italy, payable in one year. And the firm is

concerned about the amount of dollars they will have to pay for this purchase. Based on the

quotes listed below and answer the following questions.

Spot exchange rate: $$\frac{1\mathrm{.}5}{}$

Forward exchange rate: $$\frac{1\mathrm{.}35}{}$

US interest rate: $5\%$ per annum.

Interest rate for euro loans: $4\%$ per annum

Call option with strike price of $$\frac{1\mathrm{.}3}{}$ is available with premium of $$\frac{0\mathrm{.}10}{}$

Put option with strike price of $$\frac{1\mathrm{.}3}{}$ is available with premium of $$\frac{0\mathrm{.}20}{}$

a$.$ Unhedged position: If the company leaves the exposure unhedged. In one year, if the spot

rate turns out to be $$\frac{1\mathrm{.}7}{}.$ What will be the total dollar cost of this purchase? What will be

the total dollar cost if spot rate happens to be $$\frac{1\mathrm{.}3}{}$ in one year? Is the company subject to

exchange rate risk?

b$.$ Forward market hedging: If the company uses a forward contract to hedge, how can they

do it$?$ Specify the direction of position and size of the position. And what will be the total

cost of this purchase with the forward hedge? Is the company subject to exchange rate risk in

this case?

c$.$ Money market Hedge: How can the company hedge using money market hedge? Show the

steps of hedging and cash flows and calculate the total dollar cost of the purchase of euro. Is

there exchange rate risk after this hedge?

d$.$ Option market hedge: How can the company hedge using options? Specify the direction of

the position $($long or short$).$ What is the total premium paid today? When will the company

exercise the options and what will be the total dollar cost if they exercise? And when will

the company not exercise the options and what will be the total dollar cost then?