1. Suppose IBM purchased telecom equipment from Deustche Telecom and was billed 2 million payable in one year. The current spot rate is 18 dollar per euro and the one-year forward rate is 1.20 dollars per euro. The annual interest rate is 2.5% in the US and 2% in Germany. IBM can also buy a one-year call option on the euro at the strike price of $18 per euro for a premium of $0.0318 per euro.

1. Compute the future dollar costs of meeting this obligation using the forward hedge and the money market hedge.
2. Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the expected future dollar cost of meeting this obligation when the option hedge is used.
3. At what future spot rate do you think IBM would be indifferent between the option and forward hedge?
4. Illustrate your answers with the appropriate post-hedging net $ proceed charts, labeling your foreign exchange rates and hedging costs properly.