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Classwork $$ Chapter $81)$ How would you define Transaction exposure? How is it different from Economicexposure?$2)$ IBM purchased computer chips from NEC, a Japanese electronics concern, and it wasbilled Yen $250$ million payable in three months. Currently, the spot exchange rate isY$105/$$ and the three month forward rate is Y$100/$$$.$ The three month money marketinterest rate is $8$ percent per annum in the US and $7$ percent per annum in Japan. Themanagement of IBM decided to use a money market hedge to deal with this yen accountpayable. Explain and calculate the dollar cost of this$\mathrm{.}3)$ You plan to visit Geneva, Switzerland in three months to attend an international businessconference. You expect to incur the total cost of SF $5,000$ for lodging, meals and transportationduring your stay. As of today, the spot exchange rate is $$0\mathrm{.}60/$SF and the three$-$month forwardrate is $$0\mathrm{.}63/$SF$.$ You can buy the three$-$month call option on SF with the exercise rate of$$0\mathrm{.}64/$SF for the premium of $$0\mathrm{.}05$ per SF$.$ Assume that your expected future spot exchange rateis the same as the forward rate. The three$-$month interest rate is $6$ percent per annum in theUnited States and $4$ percent per annum in Switzerland.$($a$)$ Calculate your expected dollar cost of buying SF$5,000$ if you choose to hedge via call optionon SF$.($b$)$ Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using aforward contract.$($c$)$ At what future spot exchange rate will you be indifferent between the forward and optionmarket hedges?$4)$ Boeing just signed a contract to sell a Boeing $737$ aircraft to Air France. Air France will bebilled $20$ million which is payable in one year. The current spot exchange rate is $$1\mathrm{.}05/$ andthe one$-$year forward rate is $$1\mathrm{.}10/.$ The annual interest rate is $6\mathrm{.}0\%$ in the U$.$S$.$ and $5\mathrm{.}0\%$ inFrance. Boeing is concerned with the volatile exchange rate between the dollar and the euro andwould like to hedge exchange exposure.$($a$)$ It is considering two hedging alternatives: sell the euro proceeds from the sale forward orborrow euros from Credit Lyonnaise against the euro receivable. Which alternative would yourecommend? Why?$($b$)$ Other things being equal, at what forward exchange rate would Boeing be indifferentbetween the two hedging methods?

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