Just questions (b.) and (c.). Graph and excel work are there for reference.

1. You work as a broker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100.000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months a Using Excel plot your profits in three months from the deal as a function of the spot exchange rate in three months, for exchange rates from $0.98 to $1.35/ (Spot Exchange rate, $$/1, on your X-axis, profit in $$ on your Y-axis). Label this line "Unhedged Profits. 2 Unhedged Profits 1,40,000 1 20,000 1,00,000 80,000 60,000 20.000 20,000 90 Furos 2 3 Total 000 100 000 00000 00 ono in una Review View Help rences Mailings Euros 1 2 3 Total 1,00,000 1,00,000 1,00,000 3,00,000 pound 40,000 40,000 40,000 1,28,000 1,28,000 1,28,000 3,84,000 dollar Oil litres Revenue - $ 3.2 Exchange Rate $/Pound Profit in $ 0.90 4,26,667 1,26,667 0.95 4,04,211 1,04,211 1.00 3,84,000 84,000 1.05 3,65,714 65,714 1.10 3,49,091 49,091 1.15 3,33,913 33,913 1.20 3,20,000 20,000 1.25 3,07,200 7,200 1.30 2,95,385 -4,615 1.35 2,84,444 -15,556 b. Look up current $$/ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line "Forward Hedge. 27 c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts? Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from December, the gth (the due date for the project) Choose optimal in the sente of combination of strike price and premium) three-months-to- expiration options that would deliver maximum profit. 1. You work as a broker for a US company that imports European foods into the US. You just signed a deal with an Italian producer of premium olive oil. Under the terms of the contract, in three months you will receive 40,000 liters of olive oil in exchange for 100.000 euros. You are going to sell the entire shipment of olive oil to Fresh Foods Markets at $3.2/liter. All cash flows occur in exactly three months a Using Excel plot your profits in three months from the deal as a function of the spot exchange rate in three months, for exchange rates from $0.98 to $1.35/ (Spot Exchange rate, $$/1, on your X-axis, profit in $$ on your Y-axis). Label this line "Unhedged Profits. 2 Unhedged Profits 1,40,000 1 20,000 1,00,000 80,000 60,000 20.000 20,000 90 Furos 2 3 Total 000 100 000 00000 00 ono in una Review View Help rences Mailings Euros 1 2 3 Total 1,00,000 1,00,000 1,00,000 3,00,000 pound 40,000 40,000 40,000 1,28,000 1,28,000 1,28,000 3,84,000 dollar Oil litres Revenue - $ 3.2 Exchange Rate $/Pound Profit in $ 0.90 4,26,667 1,26,667 0.95 4,04,211 1,04,211 1.00 3,84,000 84,000 1.05 3,65,714 65,714 1.10 3,49,091 49,091 1.15 3,33,913 33,913 1.20 3,20,000 20,000 1.25 3,07,200 7,200 1.30 2,95,385 -4,615 1.35 2,84,444 -15,556 b. Look up current $$/ three-month futures exchange rate. Where foreign exchange futures contracts are trading? Use futures exchange rate as a forward exchange rate. Describe how you could hedge the risk of the contract with forward contract. In the figure you used for part a) plot your total expected profits from the olive oil with forward hedge as a function of the exchange rate in three months. Label this line "Forward Hedge. 27 c. Suppose that instead of using a forward contract, you consider hedging with options with three months to expiration Which kind of options (call or put) would you use? Explain, please be specific. How would you hedge your profits from the olive oil deal using option contracts? Please note that C (P) at the end of the strike indicates type of an option: Call (Put). Also, make sure that you choose the option with the maturity closest to three months from December, the gth (the due date for the project) Choose optimal in the sente of combination of strike price and premium) three-months-to- expiration options that would deliver maximum profit