10) Suppose that S0 $/ = 1.25$/, F1 $/ = 1.20$/, i = 11.56% and i$ = 9.82%. You are to receive 100,000 on a shipment of goods in one year. As a US-based firm you want to avoid foreign exchange risk.

A) Form a money market hedge that replicates the payoff on the forward contract by using the spot currency and the Euro-currency markets. Identify each contract in the hedge. Does this hedge eliminate the foreign exchange risk?