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b) You are hired to assist a client to manage the risk of a transaction. Your client (a small U.S. exporting firm) is scheduled to

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b) You are hired to assist a client to manage the risk of a transaction. Your client (a small U.S. exporting firm) is scheduled to receive a payment of 6,250,000 in 44 days in the future. Assume that your client can borrow and lend at a 6% p.a. U.S. interest rate. You have obtained the following quotes from the client's bank: Spot rate: $1.3387/ 44-day Forward rate: $1.3168/ $0.0393/ American call option on euros at the strike price of $1.29/ American put option on euros at the strike price of $1.29/ Describe the nature of your client's risk with this transaction. $0.0158/ i. (10% weighting) ii. Determine the expected dollar revenue with the Forward hedge. (10% weighting) iii. Explain which option is suitable for hedging, calculate the cost of the option and determine the minimum dollar revenue your client will receive. (20% weighting) iv. Diagram the future cash flows and comment on the risks of each hedging alternative. (25% weighting)

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