Assume you are an importer in Turkey. You have imported washing and cleaning preparations worth $300,000. Your payment to the US firm (in US dollars) is due in three months.

Three-month maturity TRY interest rate is 17% (annual) and the same maturity USD interest rate is 0.25% (annual). For simplicity assume that the borrowing and lending interest rates are the same. The spot exchange rate is 7.08TL/USS and the three-month forward exchange rate is 7.36TL/USS in the foreign exchange market. The company is cash rich and in case of excess need for cash, the company gives up interest income rather than borrowing.

There are also currency options available in the financial market.

• The exercise price of a call option with a maturity of 3 months is 7.40TL per US$. The call premium is 0.1121TL per USS.
• The exercise price of a put option with a maturity of 3 months is 7.40TL per US$. The put premium is 0.2623TL per USS.

What can you do in order to hedge this exchange rate exposure so that you can redenominate this three-month payable into a Turkish Lira denominated payable with three-month maturity?

Describe your possible strategies to hedge this transaction exposure. Please show your computations and pick the best strategy under the given financial conditions above. If possible draw a chart, showing possible outcomes of your transaction exposure strategies under different levels of exchange rate possibilities in three months.