The Nancy Jewelry Company is a US company with jewelry stores located across the United States. In March, the company signs a contract with Swiss Watch, Inc. to purchase 100,000 watches the following March ( \(T=1\) year) at the cost of \(30 S F\) per watch, with the payments to be made at the time of the March delivery. Currently, US and Swiss risk-free interest rates are both at 2\% (annual), the \(\$ / \mathrm{SF}\) spot exchange rate is \(\$ 1.10 / \mathrm{SF}\), and the \(\$ / \mathrm{SF}\) forward rates and the CME futures rate are governed by the IRPT.

a. Explain how the Nancy Jewelry Company could hedge its dollars cost of the watches against exchange rate risk using forward contracts.

b. Explain how the Nancy Jewelry Company could hedge its payment next March by using the money market. Assume it can borrow and lend dollars and Swiss francs at \(2 \%\).

c. Explain how the Nancy Jewelry Company could hedge its March payment by taking a position in the CME's SF futures contract (contract size is 125,000 SF). Evaluate the hedge at possible spot exchange rates at the March expiration of \(\$ 1.20 / \mathrm{SF}\) and \(\$ 1.00 / \mathrm{SF}\). Assume the watch payment occurs at the same time as the futures expiration and the expiring futures price is equal to the spot.