1)Dow Chemical is to deliver $1 million of chemicals to an Indian firm in one year. The one year-forward rate is 40 rupee per dollar (INR/$) and the sale is invoiced in Rupees. at the forward rate of exchange the Indian firm promises to pay Dow ($1m)(40INR/$) = 40m INR in one year

a)Identify Dow's expected future cash flow in Indian rupees on a time line.

b)Draw a risk profile for Dow chemical in terms of dollars per Indian rupee

c)If the actual spot rate in one year is 25 INR/$ = 0.04 $/INR, how much gain or loss will Dow have if it does not hedge its currency exposure? (Use the current spot rate of 30 INR/$ as the starting point in calculating gain or loss.)

d)Form a forward market hedge based on the forward price F1INR/$ = 38.8889INR/$. Indicate how the hedge eliminates foreign exchange exposure by

identifying the forward contract's cash inflows and outflows on a time line and constructing a payoff profile of the forward contract.