ABC Engineering Australia is expected to pay 200,000 to a company in Germany for importing machinery three months from now. The spot exchange rate is A$/0.63. However, it is forecast that Australian dollars will depreciate, and the exchange rate may move to A$/0.58 in three months when the company will need the Euro. The company is considering using either a forward hedge or an option hedge to mitigate the foreign exchange risk. Relevant information is provided below.

The 90-day forward rate as of today is A$/0.60.

A call option on that expires in 90 days has an exercise price of A$/0.61 with a premium of A$0.01.

A put option on that expires in 90 days has an exercise price of A$/0.59 with a premium of A$0.01.

a) Which type of option should the company use? Why?

b) Considering a forward and an option hedge, which is the best strategy for the company to mitigate the foreign exchange rate risk? Why?

c) If the company only considers using an option hedge and the actual exchange rate in three months time is A$/0.64, explain how the hedge has protected the company from its exposure to exchange rate fluctuation.