Your firm is a U.S.based importer. You have bought 1,000,000 worth of toys from an Italian firm. Payment to the Italian firm (in ) is due in 1 year. Your firm wants to hedge the payable. The one-year interest is 3% in the U.S. and 5% in the euro zone. The spot exchange rate is $1.50/

a)Figure out the exchange rate for the payable created by the money market hedging in 1 year.

b)Consider the options market hedge. What kind of option do you purchase? Call option or put option for the payable?