1. Quanta Power Inc. has entered into a purchase contract for 3 hydro-electric turbines From Funchen Industry of China for 1,700,000 for each turbine to be delivered in six months. Quanta is considering whether they should hedge this payable and if so, which instrument to use. Quanta considers the following information in their analysis: (8 pts.)
   • The current spot rate per is $.15.
   • Quanta projects the value of the in six months based on the following probability:
   • $.15 20% probability
   • $.153 50% probability
   • $.156 30% probability
   • Quanta can borrow funds in the U.S. at 6% and earn interest in China at 2%. Quanta does not have excessive operative funds. (assume all rates are annual rates).
   • Quanta can enter into a $.153 forward purchase contract for for an amount sufficient to execute the purchase with one of their banks (six-month execution date).
   • Quanta can purchase a $.151 call option for the necessary to execute the transaction but must pay a premium of $. 003.More here.

1. How much will the transaction cost Quanta if they use the forward contract hedge?
2. How much will the transaction cost Quanta if they use the Money Market hedge?
3. When the payable is paid, what spot rate will result in a break-even between the forward contract hedge and the call option hedge?
4. Using Quantas projections for future exchange rates- what is the weighted average cost of the transaction using the call option hedge?
5. Using Quantas projections for future exchange rates- what is the weighted average cost of the transaction without any hedge strategy? (use the text box to address a) through e) with support)