A French corporate treasurer expects to receive a DM11 million payment in 90 days from a German customer. The current spot rate is DM0.29870:FF1 and the 90-day forward rate is DM0.29631:FF1. In addition, the annualized three-month EuroDM and Eurofranc (French) rates are 9.8% and 12.3%, respectively.

a. What is the hedged value of the DM receivable using the forward contract?

b. Describe how the French treasurer could use a money market hedge to lock in the franc value of the DM receivable. What is the hedged value of the DM receivable? What is the effective forward rate that the treasurer can obtain using this money market hedge?

c. Given your answers in parts a and b, is there an arbitrage opportunity? How could the treasurer take advantage of it?

d. At what 90-day forward rate would IRP hold?