Question
Matteo buys and sells regularly with customers worldwide with its home currency being the dollar. It expects to receive 1.6 million in 6 months time
Matteo buys and sells regularly with customers worldwide with its home currency being the dollar. It expects to receive 1.6 million in 6 months time from a customer abroad. Exchange rates in the country of Matteo at the moment are: Exchange rate Euro Per dollar Spot 0.9431-0.9456 6-month forward 0.9360- 0.9394 12-month forward 0.9368-0.9406 Required: a) Find the rate of forward premium of the euro on the 12-month forward exchange rate both for buying and selling rates. b) Assuming that a forward contract is the only hedging tool available in the home country of Matteo, calculate the dollar receipts of the 1.6 million euros receivable from the foreign customer under a hedge condition. c) If the current spot rate at the end of 6 months is 1 dollar = Euros 0.9325-0.9400, comment on Matteo's hedging decision.
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