You are a U$.$S$.$ exporter of soybeans and have just received an order from the U$.$K$.$ You will deliver soybeans today to the buyer in the U$.$K$.$ and receive a payment of $200,400$ in one year. You are concerned about the dollar proceeds you will receive from this foreign sale in one year.

Suppose:

Forward exchange rate is $$1\mathrm{.}40$ per pound

Spot exchange rate is $$1\mathrm{.}35$ per pound

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

U$.$K$.$ interest rate is $5\mathrm{.}00\%$

Call option with strike price of $$1\mathrm{.}41$ per pound is available with premium of $$0\mathrm{.}12$ per pound.

Put option with strike price of $$1\mathrm{.}41$ per pound is available with premium of $$0\mathrm{.}10$ per pound.

Required:

a$-1.$ Unhedged Position: Suppose you decide not to do anything. In one year, the spot rate happens to be $$1\mathrm{.}45$ per pound. What will be the total dollar proceeds from this sale then?

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

a$-3.$ What will be the total dollar proceeds if the spot rate happens to be $$1\mathrm{.}32$ per pound in one year?

a$-4.$ Are you subject to exchange rate risk if you remain unhedged?

b$-1.$ Forward market hedge: How can you guarantee an exact amount of dollar proceeds from this sale using forward contracts? Should you agree to buy or sell $200,400$ forward in one year?

b$-2.$ What will be the total dollar proceeds from this sale with forward hedge?

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

c$-1.$ Money market hedge: How can you ensure guaranteed dollar proceeds from this sale using money market hedge?

c$-2.$ What will be the total dollar proceeds?

c$-3.$ Are you subject to exchange rate risk when money market hedge is used?