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Robert is owed MXN 3.7M in one year. Most of his expenses are in USD, and he would like to protect himself from exchange rate risk. One year from now, one USD will buy either MXN 17.6 or MXN 21.3. He is considering the following solutions:

1. Options . Robert is considering a put or call option, both of which have a maturity of one year. The put option has a strike price of 18.8 MXN per USD. The call option has a strike price of 22 MXN per USD. You may ignore option premiums for the purpose of this question

1. If Robert wishes to use an option to hedge, what should the underlying asset be?
2. Ignoring his preexisting transaction exposure, what would Roberts payoff be if he took the long leg of a put option with the underlying from part A at each of the possible spot prices at maturity?
3. Ignoring his preexisting transaction exposure, what would Roberts payoff be if he took the long leg of a call option with the underlying from part A at each of the possible spot prices at maturity?
4. If he wishes to hedge, should he use a put or call option? Should he take the long or short leg?
5. If Robert intends to sell the MXN he is owed for USD as soon as he gets them, and he hedges his exchange risk exposure with this option, what would his total USD cash flows be at each possible future spot rate?

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