1. In July 2008, Aracruz Celulose, a Brazilian company, tried to hedge its FX risk on $500 mil. USD in sales over three months. The spot USD/BRL was 1.60 (i.e., 1 USD = 1.60 BRL). The interest rate on BRL was 12.25% per year, while the interest rate on USD was 2% per year. For simplicity, use continuous compounding to compute interest.
   1. Explain how Aracruz could hedge its FX risk using USD/BRL forwards. When describing the company's hedging strategy, also calculate the theoretical three-month forward exchange rate for USD/BRL.
   2. Suppose Aracruz took the FX forward position at the theoretical forward exchange rate. In September 2008, Lehman Brothers collapsed, causing USD/BRL rate to rise dramatically to 2.27 by October 2008. How much did Aracruz lose on its forward contract? Answer the loss amount in BRL.