Pelaton, a US sports company, just signed a contract to sell sports equipment to

Sante, a French company. Sante will be billed 20 million which is payable in one

year. The current spot exchange rate is $1.05/ and the one-year forward rate is

$1.10/. The annual deposit interest rate is 6.0% in the U.S. and 5.0% in France.

Pelaton is concerned with the volatile exchange rate between the dollar and the

euro and would like to hedge exchange exposure.

A. It is considering two hedging alternatives: sell the euro proceeds from the sale

forward, or use the money market hedge. Which alternative would you

recommend? Why? [10 marks]

B. Other things being equal, at what forward exchange rate would Pelaton be

indifferent between the two hedging methods? (10 marks)

C. Assume the inflation rate in the US is expected to increase in the future. What

could you say about the expected future exchange rate $/ and how should the

company react to such change, if any. [10 marks]