1. Oregon Transportation Inc. (OTI) has just signed a contract topurchase light rail cars from a manufacturer in Germany for€2,500,000. The purchase was made in June with payment due sixmonths later in December. Because this is a sizable contract forthe firm and because the contract is in euros rather than dollars,OTI is considering several hedging alternatives to reduce theexchange rate risk arising from the sale. To help the firm make ahedging decision you have gathered the following information.
   • The spot exchange rate is $1.1740/€
   • The six month forward rate is $1.1480/€
   • OTI’s cost of capital is 12% per annum
   • The Euro zone 6-month borrowing rate is 7% per annum (or 3.5%for 6 months)
   • The Euro zone 6-month lending rate is 5% per annum (or 2.5% for6 months)
   • The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6months)
   • The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6months)
   • December put options for €625,000; strike price $1.18, premiumprice is 1.5%
   • OTI’s forecast for 6-month spot rates is $1.19/€
   • The budget rate, or the highest acceptable purchase price forthis project, is $2,975,000 or $1.19/€ ($2,975,000/€2,500,000)

Q.1) OTI chooses to hedge its transaction exposure in the forwardmarket at the available forward rate. The required amount indollars to pay off the accounts payable in 6 months will be__________.

Q.2)

1. Using the information provided in question 29, OTI would be____________ by an amount equal to ____________ with a forwardhedge than if they had not hedged and their predicted exchange ratefor 6 months had been correct.

Q.3)

1. Again, using the information provided in question 29, OTIchooses to hedge its transaction exposure by the money markethedge. Given the OTI's cost of capital, the future value of theU.S. dollar proceeds at the end of 6 months to pay off the accountspayable will be __________.