Question 2 (0.5p): What are the differences between foreign currency option contracts and forward contracts for foreign currency? Question 3 (2p): Note: Differently from the examples we saw in class, here you have to take into account the time value of money and discount cash flows at the proper rate. UUU is a small US exporting firm. They recently closed a sales worth EUR 7 million and they are scheduled to receive this sum in 90 days. Assume that UUU can borrow or lend USD at a 5% annual rate. The EURUSD spot rate is 1.24 and the 90 day forward rate is 1.22. One EUR option contract is EUR 125,000. The premium of an ATM call EUR option expiring in 90 days is 0.03 USD per EUR, the premium of the ATM put option is 0.04 USD per EUR. A. What is the nature of UUUs transaction exchange risk? B. Assume that UUU decides to hedge the risk with ATM options. What options would they buy and how many? What would be the cost today of this hedging strategy? C. What is the minimum dollar revenue that UUU will receive if they hedge with options? D. What (approximate) value of the spot rate in 90 days would make UUU indifferent between hedging with options or with a forward contract?