Please help me with task 3 and 4 below. just need an idea about How to start drafting solution for those two task.

Pembroke Pulp and Paper Inc. (PPPI) operates a pulp and paper mill that produces and sells newsprint. The primary inputs to production are raw materials, composed largely of wood fibres and recycled materials, as well as chemicals and additives. The company also consumes significant amounts of fuel oil, natural gas, and electricity in its processes. The chemicals and additives are paid for in U.S. dollars.About 70% of the company's annual sales are to customers in the United States. Most customer sales contracts are for fixed volumes of newsprint, with the selling price tied to a market price. This is standard for the industry, as many customers will not commit to fixed-price arrangements. In addition to other debt with fixed interest rates, the company has a short-term line of credit bearing interest at prime plus 2%.You, CPA, work as an associate with Campbell and Associates LLP, a financial and business advisory firm. PPPI's board of directors has engaged Campbell and Associates to assist in assessing and managing its risk exposures. It is February 15, 20X4, and you have been asked by your boss, Heather Larimer, to assist on this engagement for PPPI.The board of PPPI wants its risks specifically identified. The board is looking at forward contracts and options to manage these risks. Specifically, for the foreign currency risk, the board would like to understand PPPI's net exposure in U.S. dollars. To assist with this calculation, a forecast of revenues and variable expenses for the next 10 months (March 1 to December 31, 20X4) has been provided in Appendix I.The CFO of PPPI has been able to obtain quotes from the Bank of Northern Savings for foreign exchange forward contracts and options on U.S. dollars maturing in September 20X4 (Appendix II). The board would like a calculation detailing the impact on PPPI's contribution margin if 75% of the net U.S. dollar exposure is hedged with either the forward contract or the options. A recommendation should be made as to which of these risk management tools should be used for 20X4.

Task #3

Based on information provided in Appendix I, calculate the amount of PPPI's net U.S. dollar exposure. Calculate the net impact on contribution margin if the C$/US$ exchange rate is at 0.97 and 0.85 over the 10 months versus the current rate of 0.92. Make a conclusion as to whether the earnings are sensitive to C$/US$ exchange rate changes.

Task #4

Using the information provided in Appendix II:

Design two different hedging strategies using foreign exchange forward contracts and options to hedge 75% of the net U.S. dollar exposure, rounded to the nearest $10 million.

Calculate the impact on the contribution margin as a result of using either risk management tool.

Make a recommendation on which hedging strategy the company should accept.

Explain why these calculations might not match with the actual amount and timing of cash flows during the 10-month period and the implications for the company's hedging strategy.

Your response, not including any Excel worksheets, should not exceed one page.

Appendix 1 (in '000)

Newsprint selling price (US$) US$/MT $640

Foreign exchange C$/US$ 0.920

Newsprint selling price (C$) C$/MT $695.65

Total revenue (newsprint only) Note 1 $69,565

Operating costs

Variable operating costs

Raw materials $7,200

Chemicals and additives (Note 2) 5,200

Direct labour 4,450

Power purchases 10,500\

Fuel costs (oil/gas) 7,900

Other variable overheads 1,750

$37,000

Contribution margin $32,565

Notes:

1. The company's forecast newsprint sales from March 1 to December 31, 20X4, is 100,000 metric tonnes (MT).

2. The chemicals and additives are paid for in U.S. dollars, and this is the Canadian dollar equivalent using the exchange rate of $0.92 above.

Appendix II

(Quotes provided by the Bank of Northern Savings)

1. Foreign exchange forward contract

The forward contract can be for any amount of U.S. dollars in excess of US$100,000. The forward rate to sell U.S. dollars in September 20X4 is at an exchange rate of C$/US$ = 0.928. The unhedged forecast rate is 0.92.

2. Foreign exchange option

Each option contract is for US$10,000 and costs $95 per US$10,000 contract (that is, the option premium is $95 per US$10,000 contract). The option is to sell U.S. dollars at an exchange rate of C$/US$ = 0.92 in September 20X4.