On March $1$st$,$ Redwall Pump Company sold a shipment of pumps to Vollendam Dike Company of the Netherlands for $4,000,000,$ payable $2,000,000$ on June $1$st and $2,000,000$ on September $1$st$.$ Redwall derived its price quote of $4,000,000$ on February $1$st by dividing its normal U$.$S$.$ dollar sales price of $$4,320,000$ by the then current spot rate of $$1\mathrm{.}0800/.$ By the time the order was received and booked on March $1$st$,$ the euro had strengthened to $$1\mathrm{.}1000/,$ so the sale was in fact worth $4,000,000$ x $$1\mathrm{.}1000/=$ $$4,400,000.$ Redwall had already gained an extra $$80,000$ from favorable exchange rate movements! Nevertheless Redwall's director of finance now wondered if the firm should hedge against a reversal of the recent trend of the euro. Four approaches were possible:

$1.$ Hedge in the forward market. The $3-$month forward exchange quote was $$1\mathrm{.}1060/$ and the $6-$month forward quote was $$1\mathrm{.}1130/$

$2.$ Hedge in the money market. Redwall could borrow euros from the Frankfurt branch of its U$.$S$.$ bank at $8\mathrm{.}00\%$ per annum.

$3.$ Hedge with foreign currency options. June put options were available at strike price of $$1\mathrm{.}1000/$ for a premium of $2\mathrm{.}0\%$ per contract, and September put options were available at $$1\mathrm{.}1000/$ for a premium of $1\mathrm{.}2\%.$ June call

$4.$ Do nothing. Redwall could wait until the sales proceeds were received in June and September, hope the recent strengthening of the euro would continue, and sell the euros received for dollars in the spot market.