LorBoh GmbH is a medium-sized tea producer company, based in Berlin. It is now 1 December and the following transactions have been contractually agreed: i. Sale of packaged tea, cash receipt due 1 February of US$197,000 9 ii. Purchase of production equipment, invoice payable 1 May, for US$447,000 iii. Sale of packaged tea, US$154,000 cash receipt due 1 May. EUR/USD exchange rates are as follows: Spot 0.7280 - 0.7320 Forward 1 February 0.7310 0.7355 Forward 1 May 0.7340 -0.7395 EUR/USD future prices are also available (contract size US$20,000, pricing euros per US$100) March contracts 73.25 June contracts 73.85 Money market interest rates are: Euros 4% per annum US dollars 5% per annum Required a) Demonstrate how you would hedge LorBohs foreign exchange risk exposure on the forward markets. (3 marks) b) Demonstrate how you would hedge LorBohs foreign exchange risk exposure on the money markets. (5 marks) c) Compare the forward market hedge to that of the money market hedge. (7 marks) d) Calculate the hedge efficiency that LorBoh could achieve on its foreign exchange risk exposure using a futures market hedge, if i. 1 February spot EUR/USD 0.7350 -0.7390 March EUR/USD futures contracts 74 (5 marks) ii. 1 May spot EUR/USD 0.7295 -0.7335 June EUR/USD futures contracts 73