Question:Question:1.Bernd lives in Berlin and uses the euro as his currency of denomination. Bernd has an accounts payable balance of $10 million due in 3 months. The spot rate isS^/$=1.20/$. Show the parts of a money market hedge of Bernd's exposure. Draw the risk exposures of the underlying position, the money market hedge, and the net position.

2. Aphorisms Inc. has an expected cashinflowof 1 million on an accounts receivable balance due in six months. The owner, Laozi (), wants to hedge this exposure with an option contract at a strike price of K^CNY/= CNY 8.00/ and with a due date in 6 months. At this strike price, call option and put option prices are, respectively, Call^CNY/= CNY 1.00/ and Put^CNY/= CNY 2.00/. Graph the following positions (a-c) on the figure below.

a.The exposure of Laozi's underlying position

b.The payoff of Laozi's option contract at expiration including the option premium

c.The payoff of Laozi's combined position including the option premium

3. U.K.-based OSA has an expected expense of 20 million due in one year. Actual expenses might be as low as 15 million or as high as 25 million. The expected future spot rate is E[S₁^/] = $0.6000/. OSA wants to hedge the expected euro expense with a one-year 20 million euro forward contract.

d.Complete the following table assuming an exchange rate of 0.60/ and uncertain expenses. Use a minus sign (-) to indicate a cash outflow and a plus sign ( + ) to indicate a cash inflow.

Volume uncertainty at an expected spot rate of 0.60/

Underlying euro cash flows-15 million-20 million-25 million

Cash flows of the forward hedge

Pound cash flows

Euro cash flows

Net position

Pound cash flows

Euro cash flows_____