Becky Tababal and Christopher Arbassa at the company International Widget Machines (IWM) are considering various risk management strategies for hedging currency risks. The background is that IWMs revenues are in US dollars (USD) while their costs are primarily in euros (EUR) and British pounds (GBP). The current USD/EUR spot exchange rate is 1.10 (that is, 1.10 U.S. Dollars per Euro), and the USD and EUR one-year interest rates are 2.8% and 0.1%, respectively. A. Given IWMs exposure to exchange rate movements, should Becky and Christopher be concerned about a depreciation or appreciation of the USD versus the EUR and the GBP? How can they use forward contracts to reduce IWMs exposure to exchange rate movements? (8 points) B. Suppose IWM projects a sales volume in one year with expected costs of EUR 30 million. Furthermore, suppose that Becky and Christopher decide to lock in the entire expected costs by entering a USD/EUR forward contract. What will IWMs hedged costs be in USD? If the USD/EUR exchange rate in one year turned out to be 1.20, what would the gain or loss from IWMs hedging strategy have been? What if the USD/EUR exchange rate in one year turned out to be 1.05? (12 points)