**PLEASE SHOW WORKING NOTES WITH FORMULAS FOR QUESTIONS A & B -- AND ANSWER QUESTION C --- so I may compare my notes. Thank you!

**PLEASE ALSO FOLLOW THE SAME EXCEL FORMAT - thank you!

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 $100,000 for a oneyear call option on 5 million at an exchange rate of 0.88/$. 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? \begin{tabular}{|l|l|l|l|} \multicolumn{2}{c|}{ A } & B \\ \hline 1 & Payable & 5000000 & \\ \hline 2 & Time & 1 & year \\ \hline 3 & Current Spot of Dollar & 0.9 & Euro/\$ \\ \hline & & & \\ \hline 4 & Equivalent dollar value of payable today & =B1/B3 & \\ \hline \end{tabular} 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 $100,000 for a oneyear call option on 5 million at an exchange rate of 0.88/$. 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? \begin{tabular}{|l|l|l|l|} \multicolumn{2}{c|}{ A } & B \\ \hline 1 & Payable & 5000000 & \\ \hline 2 & Time & 1 & year \\ \hline 3 & Current Spot of Dollar & 0.9 & Euro/\$ \\ \hline & & & \\ \hline 4 & Equivalent dollar value of payable today & =B1/B3 & \\ \hline \end{tabular}