. Indiana Company expects to receive 5 million euros in one year from exports.

It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies:

1.unhedged strategy

2.money market hedge

3.option hedge

The spot rate of the euro as of today is $1.30. Interest rate parity exists. Indiana Company uses the forward rate as a predictor of the future spot rate. The annual interest rate in the U.S. is 6% versus an annual interest rate of 4% in the eurozone. Put options on euros are available with an exercise price of $1.25, an expiration date of one year from today, and a premium of $.04 per unit. Estimate the dollar cash flows it will receive as a result of using each strategy. Which hedge is optimal?