Bob is planning to buy an expensive guitar for his son in 6 months from an online store in Russia, and the price will be 20,000 EUROS. The six month forward rate is $1.20/euro. Currently he can buy the six month call option on Euro with an exercise price of $1.25/euro for the premium of $0.04 per Euro. Six month interest rate in US is 2%. r= 2% per six month.

a. If Bob chooses to hedge using a forward contract, what is the future dollar cost of this guitar?

b. If he decides to hedge with a call option on Euro, what is the total expected future dollar costs of this option hedging strategy on buying 20,000 Euros, assuming that the expected future spot exchange rate is the same as the forward rate?

c. At what future spot exchange rate will Bob be indifferent between the forward and option market hedges?