6. Hedging BMWs USD Exposure. You are a senior analyst in BMWs 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 FX exposure might be different.

(a) A countrys currency is often likened to its share price. What does BMWs 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 fit into BMWs stated approach to risk management?

(c) At the end of 2010, BMW has to address next years 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.