Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials that are used in a variety of pigment applications in many industries including cosmetics, appliances, and a variety of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,000,000 dirhams, payable in six months.

Six-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank Al-Maghrub at a premium of 2%. Sixmonth put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available at a premium of 3%. Compare and contrast alternative ways that Micca might hedge its foreign exchange transaction exposure. What is your recommendation?

Assumptions__________________________________________________Values

Shipment of phosphates from Morocco, Moroccan dirhams................6,000,000

Micca's cost of capital (WACC).................................................14.000%

Spot exchange rate, dirhams/$..........................................................................10.00

6-month forward rate, dirhams/$......................................................................10.40