Problem 2: Milos Inc. will be paying 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its payable position. Assuming that the spot rate in 180 days is $.65, what is the amount paid for the currency option hedge for the 500,000 Australian dollars?

1. Clearly state whether you will use the call or put to hedge.

2. Assuming that the spot rate in 180 days is $.65, what is the amount paid for the currency option hedge for the 500,000 Australian dollars?

Clearly show the cash flows from your strategy and clearly show your final answer.