A German firm will make a payment of US$15 million in 90 days. The firm calls the bank and obtains the following quotes (with bid-ask spread):

Spot US$/ market: S(US$/) = 1.1236 1.1242

90-day forward US$/ market: F90(US$/) = 1.1241 1.1249

U.S. money market: iUS$ = 2.4% 3% p.a.

German money market: i = 1.6% 2% p.a.

Note: Assume perfect hedge is possible.

a) If the (spot) US$/ rate in 90 days were 1.1245, which method, forward hedge on or money market hedge, should the German firm choose? Find the total amount of involved in the hedging technique the firm chooses. Be sure to identify it is the total amount of received or paid, and describe the transactions taken under different hedging strategies.

b) At what US$/ spot rate would the firm be indifferent between money market hedge and forward hedge?

c) If the firm expects the 90-day US$/ spot rate to be 1.1249, what would the firm do? What kind of risk the firm might face? Explain.