LEXCO Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9% versus 3% in Japan. Assume that interest rate parity exists and that LEXCO believes that the international Fisher effect holds. a. Should LEXCO finance its production with yen and leave itself open to the exchange rate risk? Explain. b. Should LEXCO finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk? c. How could LEXCO achieve low-cost financing while eliminating its exposure to exchange rate risk? (2)(a) Suppose that Loras corporation needs 100,000 euros 180 days from now. It is trying to determine whether or not to hedge this position. It developed the following probability distribution for the euro: Possible value of the pound in 180 days: $1.40 1.45 1.48 1.50 1.53 1.55 5% 10 30 30 20 5 Probability: The 180-day forward rate for the pound is $1.52 The spot rate for the pound is $1.49. Given the available information determine the expected value of the real cost of hedging and comment on the desirability or otherwise of hedging the payables. (b) A Factor agrees to buy an exporter's receivables at a 4.5% per month discount. In addition, the Factor charges a 2.25 % fee for non-recourse financing. If the exporter decides to factor $5million in 90-day receivables, how much will the exporter receive? If the financing is with recourse, will the amount received by the exporter be different? Explain with quantitative evidence. 1. (Arbitrage-free condition) Consider a one-period binomial model with risk-free interest rate r0, up factor u > 0, and down factor d > 0. Prove that the one-period binomial model is arbitrage-free if and only if d