Suppose you work in the finance division of a Norwegian multinational shipping company. Today your firm just signed a contract to export gas to Italy using one of your ships. The contract commits the Italian government topay 250 million euros (EUR) in 3 months. Given the uncertainty relative to the pandemic, as part of the finance division you are asked to come up with the best hedging option comparing forward, money market instruments, and option contracts.

a. Show detailed steps of the hedging strategy using a forward and compute the revenues in NOK for the firm.

The forward rate is F(NOK/EUR) = NOK/EUR 2.25.

b. Perform the same analysis of point a), but now use money market instruments to hedge your exposure. Show the revenues in NOK for the firm.

You need the following data:

-1-year interest rate in Norway: 2.5%

-1-year interest rate in Euro zone: 1%

-Current spot rate, S(NOK/EUR) = NOK/EUR 2.242

c. Are the results in a) and b) the same or do they differ? Answer in one line.

d. Lastly, perform the hedging using options and compute theminimumamount of revenues in NOK for the firm.

You have the two following options you can choose: - Eurooption, maturity 3 months

Listed options

-Call option:

-Put option:

Assume that the size of each contract is EUR 250,000. When

computing the premium, use interest rates as in point b).