Assume that you are a U$.$S$.-$bank importer of jewelry and just bought design pieces from Italy for $200,000.$ You owe $50,000$ to the Italian supplier in one year. You are also concerned about the amount of dollars you will have to pay for this purchase in one year.

Assume the following:

Spot exchange rate is $$1\mathrm{.}50/$euro$.$

Forward exchange rate is $$1\mathrm{.}25/$euro$.$

U$.$S$.$ interest rate is $3\mathrm{.}0\%$ per annum.

Interest rate in Europe is $4\mathrm{.}5\%$ per annum.

Call option with strike price is $$1\mathrm{.}30/$euro is available with premium of $$0\mathrm{.}10/$euro$.$

Put option with strike price of $$1\mathrm{.}30/$euro is available with premium of $$0\mathrm{.}20/$euro$.$

Please be sure to round your answers to two decimal places.

Unhedged position: Suppose you decide not to do anything. In one year, spot rate happens to be $$1\mathrm{.}50/$euro$.,$ explain what will be the total dollar cost of this purchase? Explain what the total dollar cost will be if spot rate happens to be $$1\mathrm{.}30/$ in one year and then $$1\mathrm{.}4/$euro$.$ Explain whether you subject to exchange rate risk in this case.

Forward market hedge: Explain how you can look at the exact dollar cost of this purchase by using forward contracts and whether you should agree to buy or sell $50,000$ forward in one year$$s time.

Money market hedge: Explain how you can hedge using money market hedge, where should you borrow and how much. Identify and explain the total dollar cost for this purchase and whether you are subject to exchange rate risk in this case.

Option market hedge: Describe how you can hatch using options. Describe whether you purchase put or call options on euros and what the total premium is today. Explain when you will exercise your options and what will be the total dollar cost if you exercise and when will you not exercise your options and what will be the total dollar cost.

Comparing hedging methods: Identify and explain the break$-$even exchange rates between hedging methods and which you prefer which hedging method.