1. Assume a US multinational firm has substantial funds in both a US bank and a German bank and assume that the US Federal Reserve has just announced an increase in US interest rates.

Focusing only on that change:

a. What decision as to the location of their funds might result on to part of the US multinational?

b. Given the implementation of that decision by both the US multinational firm and many other firms which also hold funds in both US and European banks, what will the impact be on EUR/USD exchange rate considering only the FED interest rate move, and why will the exchange rate change?

2. Muse, Inc. is expecting to receive 10,000,000 British pounds (GBP) in one year from the sale of a subsidiary. Muse is concerned about the impact of currency exchange rate volatility, so it decides to avoid exchange rate risk by hedging the expected receivable. The current spot rate of the GBP is quoted at 1.52. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 0.013 point adjustment to the current spot rate. Assume there are no other transaction costs.

A. Assuming the spot rate in one year is 1.45, show a calculation of the net amount realized if Muse uses an options strategy to hedge the receivable.

B. Assuming the spot rate in one year is 1.45, show a calculation of the net amount realized if Muse uses a forward contract strategy to hedge the receivable.

C. Assuming the spot rate in one year is 1.45, show a calculation of the net amount realized if Muse does not use any hedging strategy for the receivable.