Starbucks just signed a contract to buy coffee beans from a Colombian exporter Copresso S.A.S for $5 million, payable in one year. The Colombian firm wants to hedge the exchange rate risk. The current spot exchange rate is COP 4,811.25/$, and the one-year forward rate is COP 4,803.00/$. The annual interest rate is 3.75% in the U.S. and 13.50% in Colombia.

Copresso S.A.S. is considering three possible options to hedge the risk: (1) sell the dollar proceeds from the sale forward, (2) borrow dollars from Wells Fargo against the dollar receivable, or (3) buy a put option with the exercise price of COP 4,804.00/$ with a premium of $0.01 for each $10.

Which alternative would you recommend? (7 points)

How much will the proceeds in Colombian pesos be from each hedging method if we assume that Copresso S.A.S. exercises the option? Rank each method from the best to the worst based on the proceeds amount in Colombian pesos. (8 points)

What should be the future spot exchange rate so that Copresso S.A.S. decides not to exercise the option? (5 points)

PLEASE SHOW WORK