Oakley Inc is a US company that has recently agreed to buy a small marketing business based in Belgium for 13.4m, with the purchase price due to be paid in three months time, subject to the satisfactory outcome of a due diligence exercise by an accounting firm.

In order to deal with the foreign exchange risk associated with the purchase of the Belgian business, the company is considering the following choices:

1. The use of euro futures contracts that are currently priced at 0.7750/$. The contract size is 75,000 (and should be rounded to the nearest whole number of contracts).

2. The purchase of an over-the-counter option contract at an exercise price of 0.8000/$ with a premium cost of $2.4 per 100.

The current spot rate is 0.7812/$.

Note: Assume there are 360 days in a year.

Assuming that in three months time the spot rate is 0.7998/$ and the futures price is 0.7860/$:

(i) Calculate the cost of the Belgian purchase if the company uses the futures contract. (20 marks)

(ii) Calculate the cost of the Belgian purchase if the company uses the option contract. (20 marks)

(iii) Comment on the appropriateness of the futures contract and the option contract as hedging instruments for Oakley Inc in this particular situation. (10 marks)