A firm based in the USA signed an agreement to sell its product to a European firm. The

European firm will be billed $500$ million to be paid in one year. The following information is

available: spot exchange rate, $\backslash$E $$=1\mathrm{.}101$; forward exchange rate, F$$=1\mathrm{.}17$; annual

interest rate in the USA,iUSA$=4\%$; and annual interest rate in Europe, iE$=1\mathrm{.}5\%.$ The US

firm worries about rapid changes in the exchange rate between the USA dollar and the Euro

and wishes to protect itself against financial losses in the forward market. To this end it

considers two hedging alternatives: $($a$)$ it gets a loan of $500$ million from a European Bank in

anticipation of euros owned, and $($b$)$ sell forward the owned euros.

i$.$ Which method do you suggest? Justify your answer.

ii$.$ Estimate the forward exchange rate that makes the US firm to be indifferent between the two

alternatives