Delicioso Gulce (DG) is a Mexican-based candy manufacturer with over 50 years of experience in the confectionery business. It imports raw materials from countries around the world and sells its candy products to supermarkets and large retailers across Mexico. In addition to doing business domestically, DG also exports its products to neighboring countries including the U.S in the north, as well as Belize and Guatemala in south of Mexico. All raw material purchases and all sales received are denominated in MEX. Miguel Hernandez, the Chief of Finance Officer (CFO) of DG has just concluded for the sales of its products to Sweet Beery (SB), a U.S firm which amounts are equivalent to MEX3,150,120. DG grants 3-month credit before the payment is due to SB.

The following financial and market information are available for SB:

Current Spot Rate (MEX/USD) 21.0008 - 19 3-month

Forward Rate (MEX/USD) 21.0410 - 18

DGs Cost of Capital (per year) 5.55%

SBs Cost of Capital (per year) 2.80%

Borrowing Rate (per year) - Mexico 4.50%

Borrowing Rate (per year) - United States 3.10%

Information on Option Market 3-month Call Option on MEX:

Exercise Price (USD/MEX) 0.0475

Premium (USD/MEX) 0.0008

3-month Put Option on MEX:

Exercise Price (USD/MEX) 0.0477

Premium (USD/MEX) 0.0010

Both DG and SB do not have surplus cash and will raise additional funding from borrowing on short term. The deposit rate is 1% below the borrowing rate in either the U.S or Mexico. Which hedging strategy should be chosen between the money market and the option market? Show all relevant calculations. (17 marks)