Gaggle is a U.S. based firm with operations across Europe. The firm expects to pay 20mil in 90 days. As the head of the risk management department, you need to hedge against the exposure. The European prevailing interest rate is 2% p.a., while that of the U.S. is 3% p.a.. The current spot rate of the is $1.2. The 90-day forward price is $1.15/. The 90-day European call option on the $ with the exercise price of 0.85 is selling at 3% premium. The 90-day European put option on the $ with the exercise price of 0.87 is selling at 2% premium.

A) What is the dollar cost of using a forward hedge? Make sure you state your position in the forward contract. (4 marks)

B) What is the cost if you decided to use money markets to hedge against the $XX of payable in 90 days? (6 marks)

C) What is the cost of an option hedge at the time the payment is due assuming you exercise the option when the payment is due. (6 marks)

D) Based on the answers in (a), (b), and (c), which hedging methods should your firm choose? (4 marks)