finally, to stabilize output a

t the desired level of 20 using fiscal policy, government

You are a U.S. investor and currently have a portfolio worth 100 million in German bonds. The current spot exchange rate is 2/$. The current one-year market interest rates are 6 percent in the euro area and 10 percent in the United States. One-year currency options are quoted with a strike price of $0.50/; a call on euros is quoted at $0.01 per euro, and a put on euros is quoted at $0.012 per euro. You are worried that inflation in euro area will cause a drop in the euro. You consider using forward contracts or options to hedge the currency risk. a. What is the one-year forward exchange rate $: ? b. Calculate the dollar value of your portfolio, assuming that its euro value stays at 6100 million; use \$:E spot exchange rates equal in one year to 1.6, 1.8, 2, 2.2, and 2.4. First consider a currency forward hedge, then a currency option insurance. c. What could make your forward hedge imperfect