a) Define exchange rate transaction exposure

a) Define exchange rate transaction exposure. (5 marks) b) Explain ONE (1) benefit of using currency options compared with forward contracts. (8 marks) c) A U.S company namely Risdaq Inc. is going to pay its supplier in Switzerland in three months for a total of the Swiss franc (SF)13,000. Given the spot exchange rate is $0.98/SF and the 3-month forward rate s $1.02/SF. Alternatively, the 3-month call option on SF would be exercised at $1.03/SF, with the premium being $0.05/SF. The 3-month interest rate is 8 6 percent in the U.S. and 6 4 percent in Switzerland. Assume that the expected future spot exchange rate is similar to the forward rate. i) Calculate the payable in U.S. dollars if you decide to hedge using a forward contract. (8 marks) ii) What is the future spot exchange rate that will generate the same result for forward and option market hedges? (8 marks) iii) If the Swiss franc (SF) appreciates beyond $1.03/SF, what are the dollar costs of meeting the SF payable against the future spot exchange rate under options hedging?