Kansas Corp., an American company, has a payment of 5 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90 /$, this would cost Kansas $5,555,556, but Kansas faces the risk that the /$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy 5 million forward today at a one-year forward rate of 0.89 /$. Strategy 2 is to pay a premium of $100,000 for a one-year call option on 5 million at an exchange rate of 0.88 /$.

14. Kansas Corp., an American company, has a payment of 5 million due to Tuscany Corp. one year from today. At the prevailing spot rate of 0.90/$, this would cost Kansas $5,555,556, but Kansas faces the risk that the /$ rate will fall in the coming year, so that it will end up paying a higher amount in dollar terms. To hedge this risk, Kansas has two possible strategies. Strategy 1 is to buy 5 million forward today at a one-year forward rate of 0.89/$. Strategy 2 is to pay a premium of $100,000 for a one-year call option on 5 million at an exchange rate of 0.88/$. a. Suppose that in one year the spot exchange rate is 0.85/$. What would be Kansas's net dollar cost for the payable under each strategy? b. Suppose that in one year the spot exchange rate is 0.95/$. What would be Kansas's net dollar cost for the payable under each strategy? c. Which hedging strategy would you recommend to Kansas Corp.? Why