An American firm has an account payable of 5 million in 30 days. The firm can handle its open position using the following methods:

Method 1: Use forward contracts with a 30-day forward rate of US$1.1132 per .

Method 2: Use options on with an exercise price of USD1.1123 per in 30 days and a premium of US$0.0008 per .

Method 3: Leave the position open.

Note: Show your work and keep you answers to 4 decimal points if necessary.

a) If the (spot) US$/ exchange rate 30 days from now were 1.1130, which of the above methods should the firm adopt? What will be the total cost hedging?

Note: Be sure to explain what kind of forward and options on the firm used to eliminate its open position.

b) Will the firm ever use Method 1 to handle its open position? Yes/No, explain.

c) Find the range of the spot US$/ exchange rate 30 days from now will make the American firm leave its position unhedged. Explain.