You are a U.S.-based importer of bicycles and just bought competition-style bicycles for 101,000 from Italy. You owe 101,000 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 $1.55 per euro
• Forward exchange rate is $1.30 per euro
• U.S. interest rate is 3.05% per annum
• Interest rate in Europe is 4.05% per annum

Call option with strike price of $1.35 per euro is available with premium of $0.15 per euro.

Put option with strike price of $1.35 per euro is available with premium of $0.25 per euro.

d-1. Option market hedge: How can you hedge using options? Should you purchase put or call options on euros? d-2. What is the total premium today? d-3. When will you exercise your options and what will be the total dollar cost if you exercise? d-4. And when will you not exercise your options and what will be the total dollar cost then? e-1. Comparing hedging methods: What are the break-even exchange rates between hedging methods? e-2. When do you prefer which hedging method? Complete this question by entering your answers in the tabs below. Option market hedge: How can you hedge using options? Should you purchase put or call options on euros? Should you purchase put or call options on euros