(Use excel) You work as a broker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100,000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months.

b. Look up current $$/ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line Forward Hedge.

c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration. Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts?