1. Eastman Kodak gives its traders bonuses if their selective hedging strategies are less expensive than the cost of hedging all their transaction exposure on a continuous basis. What problems can you foresee from this bonus plan?

2. Many managers prefer to use options to hedge their exposure because it allows them the possibility of capitalizing on favorable movements in the exchange rate. In contrast, a company using forward contracts avoids the downside but also loses the upside potential as well. Comment on this strategy.