ABC Company, based in Wichita, has a subsidiary in Mexico that manufactures and sells its product almost entirely in Mexico, so that ABCs main exposure concern is translation exposure when profits are sent to the U.S.

a. (6 points) Using forward contracts, how can ABC Company hedge its translation exposure? Briefly explain how ABC Company would offset its translation exposure using the type of forward contract you identify.

b. (6 points) Using currency options, how can ABC Company hedge its translation exposure? Briefly explain how ABC Company would offset its translation exposure using the type of currency option you identify.