Trader Joes, a U.S. retailer, has signed a contract to buy wine and cheese from Wellington Foods, a New Zealand food company for NZ$ 7 million. The wine and cheese will be delivered in May and the NZ company will be paid in NZ$ when they deliver the products. Recently the USD has been falling against the NZ$, so to protect against a further appreciation of the USD, Trader Joes purchases call options on the NZ$, each contract worth NZ$ 100,000 each. The strike price is .65 $/NZ$ and the option premium is $.02/NZ$.

(a) How many call options will Trader Joes need to buy to cover their exchange rate risk from being paid in NZ$?

(b) If at expiration, the NZ$ appreciates to .70 $/NZ$ - would they exercise the option? How much do they receive in US dollars?

(c) If at expiration, the NZ$ depreciates to .61 $/NZ$ would they exercise the option? How much do they receive in dollars?