1.Eric is purchasing a put option to hedge his transaction exposure. It has an underlying asset of MXN 295,220, a strike price of USD 0.053 per MXN. What is his payoff on this option if at maturity the spot rate is USD 0.044 per MXN, and the present value of the option premium is USD 2,709? Please give your answer to the nearest US dollar.

2.Assuming Eric has set up his hedge correctly, and has completely hedged his transaction exposure, what foreign currency is Eric exposed to? What is the size of his exposure? Does he owe foreign currency, or is he owed foreign currency? You may assume that Eric does his books in USD.

3.In this case, would Eric have been better or worse off if he had instead used a forward contract with the same maturity and underlying asset, and a contractual exchange rate of USD 0.056 per MXN?

4.Transaction exposures can be hedged with either forwards or options. List one benefit and one drawback of using each of these securities to hedge transaction exposure.