A Ford dealer in the United States may be exposed to a devaluation of the yen if this leads to a cut in the price of Japanese cars. Suppose that the dealer estimates that a 1% decline in the value of the yen would result in a permanent decline of 5% in the dealer’s profits.

How should she hedge against this risk, and how should she calculate the size of the hedge position? ( Hint: You may find it helpful to refer back to Section 26-6.)

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