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a. Money market hedge: Borrow euros
1,000,000/1:06 = 943,396 euros to be borrowed
Convert the euros to dollars:
943,396 euros ×$1:20 ¼ $1,132,075
Invest the dollars:
$1,132,075 ×1:08 = $1,222,641

b. Put option: Pay premium of
$:04 1×000,000 ¼=$40,000
f the spot rate in 1 year is $1.22 as expected, then the put option would be exercised at the strike price of $1.23. The cash flows would then be 1,000,000 ×(1:23 $:04 premium) = $1,190,000

Thus, the money market hedge would be most appropriate

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