The US imports good A from Europe and exports good B to Europe. The quantity of imports of good A is 400. The quantity of exports of good B is 200. Prices are set in the producer's currency (PCP): 10 Euros for good A and $20 for good B. The current exchange rate is $1/Euro. The import price elasticity is 2 and the export price elasticity is 1. Compute the US trade balance before and after a 10 percent appreciation of the dollar. b. How does your answer to the previous question change under LCP, where exporters set prices in the importer's currency ($10 for good A and 20 Euros for good B)? c. How does your answer change when all prices are set in dollars ($10 for good A and $20 for good B)? 2. (30 points) a. Assume that a US investor receives 1 mln. Euros in 3 months. How can the investor hedge the exchange rate risk through the forward market? How can the investor hedge the exchange rate risk through the option market? b. Assume that the forward exchange rate is $1/Euro for a forward contract with payment and delivery in 3 months. If you buy