Suppose you own a Norwegian startup firm which imports guacamole from Mexico. Yesterday your firm purchased a stock of guacamole for 250,000 mexican peso (MEP) and promised to repay in 3 months. You are not sure whether to hedge or not your exposure. Therefore, you asked your employees in the finance division to come up with an estimate of the future spot exchange rate, E[S(NOK/MEP)]. After days of hectic work they tell you that the internal model to forecast future spot exchange rates gave E[S(NOK/MEP) NOK/MEP 2.30. a) Show detailed steps of the hedging strategy using a forward and compute the cost in 1. NOK for the firm to meet its obligation. The forward rate is F(NOK/MEP) NOK/MEP 2.25. Would you hedge your exposure? b) Perform the same analysis of point a), but now use money market instruments to hedge your exposure. Show the cost in NOK for the firm. You need the following data: 1-year interest rate in Norway: 1% 1-year interest rate in Mexico: 16 % Current spot rate, S(NOK/MEP) = NOK/MEP 2.25 c) Why do the results in point a) and b) differ? Answer in one line. d) Lastly, perform the hedging using options and compute the maximum cost in NOK for the firm to meet its obligation. You have the two following options you can choose: Mexican peso European call option, maturity 3 months Listed options Premium Strike price: NOK/MEP 2.18 Strike price: NOK/MEP 2.2 NOK/MEP 0.05 NOK/MEP 0.001 Assume that the size of each contract is MEP 250,000. When computing the premium, use interest rates as per point b)