Assume that you are the CFO of a small Australian-based automotive components manufacturer, OZPRTS Co. As a result of the closure of the major automotive manufacturers plants in Australia (your former customers), OZPRTS Co. has taken on a large contract to produce 200,000 aluminium transmission casings per annum for a large EU-based automotive manufacturer with primary operations in Germany. OZPRTS Co.s CEO has guaranteed a fixed euro price on the casings over the first three years of the contract. You are greatly concerned about the possibility of increases in the price of aluminium for two reasons. One is the increased prices for metal as a result of the increases in its global demand given its use in the automotive and power transmission industries. The other is the potential for the AUD price to increase due to the impact of adverse changes in exchange rates against the Australian dollar. You are also concerned with potential currency exposures on the revenue side of the contract

Critically evaluate whether you should use options or futures to hedge against the risks that OZPRTS Co. faces from its purchase of aluminium. You should: i) use appropriate diagrams to indicate both OZPRTS Co.s exposure to, and the impact of, each of these derivative-based hedges on the cost of aluminium and the relevant exchange rate ii) identify and explain any problems that might be present in the implementation of each of these derivative-based hedging strategies (e.g. accuracy, cost), both individually and in combination with each other iii) choose one of these derivative-based hedge instruments for each of the exposures that OZPRTS Co. faces on its input side and justify your choice