Central Valley Transit Inc. (CVT), a U.S.-based MNC, has just signed a contract to sell light rail cars to a client in Germany for 3,000,000. The sale is made on credit today, and the sale proceeds in cash will be received in six months. Because this is a sizable contract for the firm and the agreement is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. You have gathered the following information to help the firm make a hedging decision.

The spot exchange rate is $1.250/Euro. The six-month forward rate is $1.22/Euro. CVT's cost of capital is 11%. The Eurozone 6-month borrowing rate is 9%. The Eurozone 6-month lending rate is 7%. The U.S. 6-month borrowing rate is 8%. The U.S. 6-month lending rate is 6%. The 6-month put option for the euro has a strike price of $1.28/Euro and a premium of $0.03/Euro.

The probability distribution of the expected spot rate between USD and uro in six months is forecasted to be: $1.27/----50% $1.23/----20% $1.25/----30% a) Please analyze and evaluate alternative contractual hedging techniques that can be applied to this position (consider no hedge as an alternative) with detailed calculations.

b) If you were the CFO of this multinational corporation, would you hedge against the transaction exposure borne due to this position? If so, which contractual hedging alternative would you choose and why? Please justify your answer with the data and show your step-by-step calculations.