1. Suppose on July 1st, 2003, Porsche expected $1 million sales from the U.S. at the end of July. OnJuly 1st, 2003, the spot exchange rate was $1.1362/, the 30-day forward exchange rate was$1.1400/, and the 60-day forward exchange rate was $1.1450/. Porsche predicted that by theend of July, the spot exchange rate would be $1.1390/ and the 30-day forward exchange ratewould be $1.1460/. Porsche also predicted that during August, 2003, the U.S. would have amonthly interest rate at 4% and inflation rate at 1%, while Euro zone would have a monthlyinterest rate at 5% and inflation rate at 3%. Which of the following strategies will generate themost for Porsche at the end of August?

(A) Porsche should convert the $1 million to right away at the end of July.

(B) Porsche should hedge the $1 million sales through the 30-day forward contract on July 1st, 2003.

(C) Porsche should hedge the $1 million sales through the 60-day forward contract on July 1st, 2003.

(D) Porsche should hedge the $1 million sales through the 30-day forward contract on July 31st,2003.

2. What are the major factors affecting foreign exchange rate and how?