Assignment $4$

spot rate is likely to be &$\frac{1\mathrm{.}05}{?}$ EUR in six months.

a$.$ What is the expected gain$/$loss from the forward hedging?

b$.$ If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? Why or why not?

c$.$ Suppose the foreign exchange advisor predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?

d$.$ Suppose now that the future spot exchange rate is forecast to be $.$ Would you recommend hedging? Why or why not?

rate is $8$ percent per annum in the U$.$S$.$ and $7$ percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.

a$.$ Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.

b$.$ Conduct the cash flow analysis of the money market hedge.

From the perspective of a U$.$S$.$ firm that owns an asset in Britain, the exposure can be measured by the coefficient $($b$)$ in regressing the dollar value $($P$)$ of the British asset on the dollar$/$pound exchange rate $($S$).$

Where

$a$ is the regression constant.

$e$ is the random error term with mean zero.

$b$ is the regression coefficient that measures the sensitivity of the dollar value of the asset $(P)$ to the exchange rate $(S).$

If the equation of Asset $A$:$Pa=3+1^{**}S$ and the equation for AssetB:$Pb=1+3^{**}S,$ how to hedge the exchange rate risk with these two assets?