Question $1$

$[10$ Marks$]$

Manala Co $($a US firm$)$ expects to receive $1$ million euros in $1$ year. The spot rate of the euro

is $$1\mathrm{.}20.$ The $1-$year forward rate of the euro is $$1\mathrm{.}21.$ Manala expects the spot rate of the

euro to be $$1\mathrm{.}22$ in $1$ year. Assume that $1-$year put options on euros are available, with an

exercise price of $$1\mathrm{.}23$ and a premium of $$0\mathrm{.}04$ per unit. Also assume the following money

market rates:

United States Eurozone

Deposit Rate $8\%5\%$

Borrowing Rate $9\%6\%$

$($a$)$ Determine the dollar cash flows to be received if Manala uses a money market hedge. $($Assume Manala does not have any cash on hand.$)$

$($b$)$ Determine the dollar cash flows to be received if Manala uses a put option hedge.