1. a)Firm AAA, located in the U.S., has a payable obligation of 500 million payable in one year to a bank in Japan. The current spot rate = 110/$, the one year forward rate = 125/$. The future dollar cost of meeting this obligation using the forward contract hedge is

2. Insufficient information

   $4,187,911

   $4,000,000

   $4,545,454

   b)Firm AAA is located in the U.S.. It has sold a Germany firm 1,000,000 worth of product. The receivable will be collected a year later. Firm AAA will use put options to hedge the risk of the receivable. The put option has a strike price of $1.41. Firm AAA paid an option premium $0.01 per euro. Assume that at maturity one year later, the exchange rate= $1.20. Which of the following is correct.

   Firm AAA will generate $1,350,000 on the sale net of the cost of hedging.

   None of the above

   Firm AAA will generate $1,420,000 on the sale net of the cost of hedging

   Firm AAA will realize $1,400,000 on the sale net of the cost of hedging.

   c)

   Question: If firm AAA chooses to hedge its transaction exposure in the forward market, it will ________ euro forward at a rate of ________.

   		sell; $1.30
   		sell; euro 1.40
   		buy; $1.40
   		buy; $1.30

   D)

   Question: The call options for euro has a strike price $1.38, premium price is $0.02. If firm AAA chooses to hedge its transaction exposure using call option, the required amount in dollars to pay off the accounts payable in a year will be ________.

   		$1,380,000
   		$1,400,000
   		None of the above
   		$1,420,000