Consider a U.S.-based company that exports goods to Germany. The U.S. company expects to receive a payment of 1,000,000 for the exports in one year. The U.S. company wants to hedge against a possible decline in the value of the euro that would lead to a drop in the dollar value of the euro receipt in one year. The current spot exchange rate is $1.20/ and the one-year forward rate is $1.25/. The annual interest rate is 5% in the U.S. and 3% in Germany.

a. How to do the hedge using a forward contract? Compute the guaranteed dollar proceeds in one year using the forward hedge.

b. How to do the hedge using money market instruments? Compute the guaranteed dollar proceeds in one year using money market hedge.

c. If the U.S. company decides to hedge using put option on euros, what would be the gross and net dollar proceeds in one year? Assume that the $- spot exchange rate is $1.18/ in one year. Also suppose that the one-year put option has an exercise price of $1.26/ and a premium of $0.05/.