Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for 5,000,000 . The purchase is made in June today with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in rather than $, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

• The current spot exchange rate is $1.28/.
• The six month forward rate is $1.34/.
• CVT 's cost of capital is 14%.
• The Euro zone borrowing rate is 12% annually.
• The Euro zonelending rate is 10% annually.
• TheU.S. 6-month borrowing rate is 9% annually.
• The U.S. 6-month lending rate is 4%.
• The strike price for December call options for 5,000,000 is $1.32/ and the option premiumis 2.5% of the total cost of the option based on the current spot exchange rate.
• CVT's FX advisors forecast for 6-month spot rates is $1.29/.

Based on theinformationprovidedabove:

1. Calculate the cost of eachhedging alternative available to CVT.
2. Based on your findings in part (a), which hedgingalternative(s) would your ecommend to CVT? Which factors should CVT consider in making its final decision on choosing the best hedging alternative?