Union Corp must make a single payment of $5$ million in six months at the maturity of a payable to a French firm.

The finance manager expects the spot price of the $$ to remain stable at the current rate of $$1\mathrm{.}60/.$

But as a precaution, the manager is concerned that the rate could rise as high as $$1\mathrm{.}70/$ or fall as low as $$1\mathrm{.}50/.$

Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures.

Six months Call and Put options with an exercise price of $$1\mathrm{.}60/$ are available.

The Call sells for $$\mathrm{.}08/$ and the Put sells for $$\mathrm{.}04/.$ A six$-$month futures contract on $$ is trading at $$1\mathrm{.}60/.$

$$ Should the manager be worried about the dollar depreciating or appreciating?

$$ If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why?

$$ If futures are used to hedge, should the company buy or sell $$ futures? Why?

$$ What will be the net payment on the payable if an option contact was used?

Assume the following three scenarios: the spot price in six months will be $$1\mathrm{.}50/,$ $$1\mathrm{.}60/,$ or $$1\mathrm{.}70/.$

$$ What will be the net payment if futures had been used to hedge using the same scenarios as above.

$$ Which method of hedging is preferable?