1. Your firm is a U.S.based exporter. You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm (in ) is due in 1 year. Your firm wants to hedge the receivable. The one-year interest is 5% in the U.S. and 2% in the euro zone. The spot exchange rate is $1.40/ . a) Consider the money market hedge.

i) Figure out the present value of the receivable in euros.

ii) Figure out your action. In other words, do you need to borrow or invest the present value of the receivable in the Eurozone now?

iii) Figure out the future value of the receivable in dollars.

Consider the forward market hedge. Do you take a long or short portion for the receivable?