It is October 2012. Iris Oil Inc., a Houston-based energy company, has a CAD 300 million receivable due in June 2013. Iris Oil decides to use options to reduce FX risk. Available options with June maturity are:

X calls puts

.94 USD/CAD 2.49 0.29

.98 USD/CAD 1.68 1.77

1.00 USD/CAD 0.17 4.83

where X represents the strike price and premiums are expressed in USD cents i.e., 1.77 equals to USD 0.0177. Today, the exchange rate is .98 USD/CAD. A. Calculate the premium cost and use a graph to describe the net cash flows (in USD) in June for Iris Oil under the following choices: i) in-the-money option ii) out-of-the money option B. Suppose Iris Oil can sell CAD forward at Ft,June = .99 USD/CAD. Calculate the cash flows (in USD) in June for Iris Oil under the forward contract. What are the pros and cons of the forward contract relative to the option alternative?