Suppose Qantas (QAN, an Australian-based company) purchased a plane from Boeing (a US based Company) for USD100 million payable in one year. The current spot exchange rate is USD 1.5 = AUD 1 and the annual interest rate is 8% in Australia and 4% in the United States.

a. Compute the future AUD cost of meeting this obligation using a money market hedge.

b. If the one year forward exchange rate was USD1.55 = AUD1, compute the AUD cost of hedging with forwards.

c. Comparing the two hedging approaches, which one should Qantas have used? Explain. A