Please solve IV and b)

1. Your firm is a U.S.-based importer. You have bought 1,000,000 worth of toys from an Italian firm. Payment to the Italian firm (in ) is due in 1 year. Your firm wants to hedge the payable. The one-year interest is 3% in the U.S. and 5% in the euro zone. The spot exchange rate is $1.50/ . a) Consider the money market hedge. i) Figure out the present value of the payable in euros. (20points) ii) Figure out your action. In other words, do you need to borrow or invest the present value of the payable in the Eurozone now? (20points) iii) Figure out the future value of the payable in dollars. (30points) 1 iv) Figure out the exchange rate for the payable created by the money market hedging in 1 year. (30points) b) Consider the options market hedge. What kind of option do you purchase? Call option or put option for the payable? (20points)