2 Though the real estate market has been depressed in some countries due to the aftermath of the global financial crisis, the markets in some countries or cities have kept their robust growth in prices and expansions. A noteworthy case is commercial and residential properties in Copenhagen, Denmark. To tap into the above market, you have already entered into a sizeable investment in a commercial property. The currency of Denmark is Danish Kroner, or Krone, and we use DKK for it below. In brief, you have made arrangements for the purchase of a commercial property in Copenhagen for DKK 134.00 million. The functional currency of your company is the US dollar. By seeking a substantial amount of help and guidance from your real estate agent, lots of detailed arrangements, including signing of the contract, computing the closing costs, funding the purchase, etc., have already been taken care of. The only remaining item that is the subject of this inquiry is a lump sum payment of DKK 4,500,000.00 upon the occupancy (delivery) of the property, which is scheduled for three months from today. Considering the variations in the currency market these days, you are very concerned that your expected payment of DKK 4,500,000.00 million may impose unnecessary foreign exchange risk for your company. You are considering several hedging alternatives to reduce the exchange rate risk arising from this purchase. The following information is made available to you today: ? The spot exchange rate is DKK 5.66/$ ? The three month forward rate is DKK 5.92/$ ? Forecast of the management for the end of the third month is DKK 5.60/$ ? The company’s cost of capital is 12 percent per year. ? The Danish 3-month borrowing or lending rate is 6 % per annum ? The U.S. 3-month borrowing or lending rate is 3.4 % per annum ? A call or put option for the strike price of DKK 5.85/$ carries a premium of 1.25 percent for this period. Based on the above information, first read further instructions below, then…