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A US firm ETTC Consulting has net receivables of 250,000 EUR in six-month's time as compensation for work undertaken. The current spot rate is EUR/USD

A US firm ETTC Consulting has net receivables of 250,000 EUR in six-month's time as compensation for work undertaken.

The current spot rate is EUR/USD 1.2866/1.2911

Interest rates in Europe are currently 1% for investing and 3% for borrowing. US interest rates are currently 0.5% for investing and 2% for borrowing.

All interest rates are quoted in nominal annual terms

ETT which to implement a money market hedge.

a) in which currency should the firm invest and in which currency should they borrow?

b) how much should be invested by the firm?

c) how much should be borrowed today?

d) what will the future asset be from the investment made?

e) including hedging, what is the effectve rate of exchange? (EUR/USD)

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