6. Hedging BMW' USD Exposure. You are a senior analyst in BMW's Finance Division asked to outline possible avenues to address the remaining risks and exposures arising from the North-American operations. However, first, you provide some background and why this transaction might be different.

(a) A country's currency is often likened to its share price. What does BMW's FX forecasting model suggest about their expectations for the American economy, the USD, and their need for hedging their USD exposure?

(b) What is the best strategy of all listed above to minimize the expected USD exposure? How does it t into BMW's stated approach to risk management?

(c) At the end of 2010, BMW has to address next year's currency risk-management challenges. Propose an estimate for (net) USD exposure in 2011 and design a money-market hedge for it. Describe the mechanics of the hedge and compute the implied forward rates on the basis of the provided numbers.

(d) What are the dangers of leaving the exposure unhedged? Might there be any advantages to this course of action?

(e) Exchange rate uncertainty does not necessarily mean that firms face exchange risk exposure. Why might this be the case?

(f) Bonus problem. Although BMW do not speculate their Finance Division is not averse to exploiting arbitrage positions. Analyze the data in the case and determine what 1Y USD forward rates would offer arbitrage opportunities. Construct an example, present a detailed strategy, and compute its potential profits for a spot rate of EUR/USD 0.7454 and 1Y forward rate of USD/EUR 1.3343.