Alcoa, a U.S. firm, has signed a contract to purchase goods from a manufacturer in Germany for 5,000,000. The purchase was made in June with payment due six months later in December. The following market quotes are available: o The spot exchange rate is $1.20/ o The six month forward rate is $1.21/ o The Euro zone 6-month borrowing rate is 7% o The Euro zone 6-month deposit rate is 5% o The U.S. 6-month borrowing rate is 6% o The U.S. 6-month deposit rate is 4% (a) Calculate the six-month forward premium/discount for euros. Show your calculations.

(b) If Alcoa chooses to hedge its transaction exposure in the forward market at the available rates, what will be the required amount in dollars to pay off the accounts payable in six months? Show calculations to support your answer.

(c) If Alcoa chooses to hedge its transaction exposure in the money market at the available rates, what will be the required amount in dollars to pay off the accounts payable in six months? Explain the steps and show calculations to support your answer. Would Alcoa be better off using a forward hedge or a money market hedge?