Indiana Co$.$ expects to receive $4$ million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $$1\mathrm{.}07.$ Interest rate parity exists. Indiana Co$.$ uses the forward rate as a predictor of the future spot rate. The annual interest rate in the United States is $10$ percent versus an annual interest rate of $3$ percent in the eurozone. Put options on euros are available with an exercise price of $$1\mathrm{.}12,$ an expiration date of one year from today, and a premium of $$0\mathrm{.}05$ per unit. Estimate the dollar cash flows that Indiana Co$.$ will receive as a result of using each of the following strategies:

unhedged strategy

money market hedge

put option hedge

Do not round intermediate calculations. Round your answers to the nearest dollar.

Total Amount Received

Unhedged strategy $

Money market hedge $

Put option hedge $

Which hedge is optimal?

The money market hedge and unhedged strategy achieve the same outcome, which is more favorable than the put option strategy.

The put option hedge and unhedged strategy achieve the same outcome, which is more favorable than the money market hedge.

The money market hedge and put option hedge achieve the same outcome, which is more favorable than the unhedged strategy.