Drake's Brewery is a business based in Chicago that imports specialty beers from Europe. It has signed a contract with a Belgium Brewer and it must pay 2,500,000 in 6 months. Drake's Brewery would like to hedge its obligation. Any necessary cash is taken from the company's operations.

The following quotes are available:

• The spot exchange rate is $1.1000/
• The six month forward rate is $1.1500/
• Drake's Brewery's cost of capital is 6% per year (or 3% for 6 months)
• The Euro zone 6-month borrowing rate is 2% (or 1% for 6 months)
• The Euro zone 6-month lending rate is 1% (or 0.5% for 6 months)
• The U.S. 6-month borrowing rate is 3% (or 1.5% for 6 months)
• The U.S. 6-month lending rate is 2% (or 1% for 6 month)

Part a: Calculate the receipt/costs of the forward and money market alternatives in dollars. (you must show your work showing dates and amounts that transactions happen to get credit/partial credit and clearly state the final amounts and receipt/payment dates) (answer should require one page maximum)

Part b:What hedge will Drake's Brewery pick? (you must show your work to get credit/partial credit and clearly state the picked hedge) (answer should require one page maximum)