INTL Inc. sells industrial washers all over the world. A significant portion of their sales are in Europe. To improve its transportation costs, the company has decided to build a plant in Germany. INTL Inc. has a banking relationship in the United States and secures financing from ABC Bank through a US dollar denominated loan for USD75MM. The loan will be paid off from cash flow generated from the operations at the German production facility. The USD75MM loan is for five years and is priced at 6 Month LIBOR + 3.00%. There are annual principal payments of USD15MM at the end of each year. Interest payments are semi-annual. Current USD/EUR exchange rate is 1.20 USD/EUR

1. List all the risks inherent in this arrangement and which risks are inherent to operating this business and which ones can be hedged away.
2. Formulate a hedge that will reduce or eliminate as many of the risks that you identified above. Describe in as much detail as possible, what the structure of the hedge/s will be and explain how the different components of the hedge reduces or takes away each of the risks that you identified can be hedged away. Make sure to describe the net cash flows of INTL Inc. with and without the hedge.
3. After two years, the Euro has strengthened and the new exchange rate is 1.45 USD/EUR. Is your hedge in-the-money or out-of-the money? Explain your answer in detail.