You are a U$.$S$.-$based importer of bicycles and just bought competition$-$style bicycles for $100,000$ from Italy. You owe $100,000$ to the Italian supplier in one year. You are concerned about the amount of dollars you will have to pay for this purchase in one year, Suppose:

Spot exchange rate is $$1\mathrm{.}50$ per euro

Forward exchange rate is $$1\mathrm{.}25$ per euro

U$.$S$.$ interest rate is $3\mathrm{.}00\%$ per annum

Interest rate in Europe is $4\mathrm{.}00\%$ per annum

Call option with strike price of $$1\mathrm{.}30$ per euro is available with premium of $$0\mathrm{.}10$ per euro.

Put option with strike price of $$1\mathrm{.}30$ per euro is available with premium of $$0\mathrm{.}20$ per euro.

Required:

a$-1.$ Unhedged position: Suppose you decide not to do anything. In one year, the spot rate happens to be $$1\mathrm{.}50$ per euro. What will be the total dollar cost of this purchase then?

a$-2.$ What will be the total dollar cost if the spot rate happens to be $$1\mathrm{.}30$ per euro in one year?

a$-3.$ What will be the total dollar cost if the spot rate happens to be $$1,40$ per euro in one year?

a$-4.$ Are you subject to exchange rate risk in this case?

b$-1.$ Forward market hedge: How can you lock in the exact dollar cost of this purchase by using forward contracts? Should you agree to buy or sell $100,000$ forward in one year's time?

b$-2.$ What will be the total dollar cost of this purchase with the forward hedge?

b$-3.$ Are you subject to exchange rate risk in this case?

c$-1.$ Money market hedge: How can you hedge using money market hedge? Where should you borrow and how much?

c$-2.$ What will be the total dollar cost of this purchase with money market hedge?

c$-3.$ Are you subject to exchange rate risk in this case?

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