IBMwill receive a payment totaling5 million next month from Italian suppliers. It canbuyeuro putoptions with a strike price of $1.22 at a premium of 2.0 cents per euro. The spot priceof the euro is currently $1.25, and the eurois expected to trade in the range of $1.18 to $1.30. IBM also can take a short position in the euro futures contract with futures price at $1.27.

a.How many options and futures contracts will IBMneed to protect its payment? Each contract sizeis 62,500 for options and 125,000 for future sand calculate the breakeven points

b.Diagram IBM's profit and loss associated with the putoption positionand futures positionwithin its range of expected exchange rates. Ignore transaction costs and margins

c.Calculate what IBMwould gain or lose on the optionand the futurewithin the range of expected future exchange rates at three points: $1.20, $1.23 & $1.28.