It is May 2017 and Fan Milk Ghana has just signed a contract for the purchase of equipment from a supplier in Germany. The cost of the equipment is 1 million and payment is due in 6 months' time.

Additional information is as follows:

• The current spot exchange rate is GH 4.50/.
• Interest rate on the euro is 2% per annum
• Interest rate on the cedi is 20% per annum
• Fan Milk Ghana has access toat the moneyOTC options on euros, expiring 6 months from now. The premiums for the options are as follows:
• o Call - a premium of GH 0.10/. o Put - a premium of GH 0.06/.
• Required:

Calculate Fan Milks's total cost of the equipment to arise from each of the following strategies. The cost should be calculated as it would be at the time of delivery of the equipment in cedis:

A. Not hedging the transaction because it is known that future spot exchange rates can accurately be predicted based on Interest Rate Parity (IRP).

B. Hedging in the options market. Any premiums paid will come from an overdraft account on which Fan Milk pays 20% per annum.