You plan to visit one of your friends living in Colorado, America in three months. You expect to incur the total cost of US$20,000 for lodging, meals, and transportation during your stay. As of today, the spot exchange rate is RM_____/ US$ and the three-month forward rate is RM_____/ US$ (please refer to Table 1 below for your given rates). You can buy the three-month call option on US$ with the exercise rate of RM4.3/ US$ for the premium of RM1 per US$. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 3.2 percent per annum in Malaysia and 2 percent per annum in the United States.

1. Calculate your expected ringgit cost of buying US$20,000 if you choose to hedge via call option on US$. (7 marks)

2. Calculate the future ringgit cost of meeting this US$ obligation if you decide to hedge using a forward contract. (5 marks)

3. At what future spot exchange rate will you be indifferent between the forward and option market hedges? (5 marks)

4. Illustrate the future ringgit costs of meeting the US$ payable against the future spot exchange rate under both the options and forward market hedges. (8 marks)

TABLE1

S(RM/USD)	F3m(RM/USD)
4.195	4.245