1. Last year, your company sold electronic products to Brazil. You are expecting to receive Real 850,000 in 6 months. The following quotations are provided by a currency dealer:

In $ per $

Real 0.4200 2.3810

1 m. forward 0.4210 2.3753

3 m. forward 0.4350 2.2989

6 m. forward 0.4115 2.4301

a. Draw the profit/loss graph for your unhedged position. If the spot rate in 6 months is $0.4000/ Real, what would be your profit/loss for your unhedged position (based on the related forward rate quotation)

b. Describe how you can hedge your currency risk. Draw the profit/loss graph for your long or short forward position. If the spot rate in 6 months is $0.4000/Real, what would be your profit/loss for your long or short forward position.

c. Draw your graph for your combined position (unhedged plus long or short forward contract). What is your profit/loss for the combined position?

d. If you are completely confident that the spot rate in 6 months will be 0.4228, do you need to take a short or long position in Real forward contract?