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Cooper Co. has 6 million payables dominated in euro, due in 1 year. The company considers the following two hedging strategies: i) purchase a 1-year
Cooper Co. has 6 million payables dominated in euro, due in 1 year. The company considers the following two hedging strategies: i) purchase a 1-year forward contract with a forward rate of 1.20 USD/euro. ii) Using the money market with a 23 annaul interest rate in the US and the current spot exchange rate is $1.22/euro. Based on the above information, answer the following questions. a) Is the interest rate in Europe higher or lower than that is the US? b) What is the annual rate in Europe making the company indifferent between those two hedging strategies? c) For b), does the amount of 5 million play any role? d) If using the money market, how much euro the company should purchase today? Cooper Co. has 6 million payables dominated in euro, due in 1 year. The company considers the following two hedging strategies: i) purchase a 1-year forward contract with a forward rate of 1.20 USD/euro. ii) Using the money market with a 23 annaul interest rate in the US and the current spot exchange rate is $1.22/euro. Based on the above information, answer the following questions. a) Is the interest rate in Europe higher or lower than that is the US? b) What is the annual rate in Europe making the company indifferent between those two hedging strategies? c) For b), does the amount of 5 million play any role? d) If using the money market, how much euro the company should purchase today
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