You are the chief financial officer of Eurochem GmbH a German company which has just signed a

contract for the supply of chemicals to a manufacturer in the United States for $$2$ million in a year$$s

time. You have collected the following data relevant to this project.

Spot exchange rate $$1\mathrm{.}3=1$

One year forward exchange rate $$1\mathrm{.}7=1$

US one year interest rate $15\%$

Eurozone one year interest rate $10\%$

Price of a put option for $$2$m at an exercise price of $0\mathrm{.}6$ per dollar $250,000$

Outline the main risks which Eurochem faces as a result of this contract. How can Eurochem hedge

against these risks? Which hedging strategy would you recommend for Eurochem? Give appropriate

calculations and explanations for your answer.