Use the information for following problem(s).

Firm AAA is located in the U.S.. It has purchase from a Germany firm 1,000,000 worth of product. The payable will be processed a year later. Refer to the following for details.

The current spot exchange rate is $1.40/euro

The one year forward rate is $1.30/euro

The Euro zone annual interest rate = 2%

The U.S. annual interest rate = 3%

Call options for euro has a strike price $1.38, premium price is $0.02

Question a): If firm AAA chooses to hedge its transaction exposure in the forward market, the required amount in dollars to pay off the accounts payable in a year will be ________.

		$1,500,000
		$1,400,000
		$1,300,000
		$1,375,000

Question B): If firm AAA locks in the forward hedge at $1.30/euro, and the spot rate when the transaction was recorded on the books was $1.40/euro, this will result in a "foreign exchange accounting transaction ________" of ________.

		gain; euro 50,000
		loss; euro 50,000
		loss; $100,000
		gain; $100,000