Problem 1: You work for an Argentinean wine exporter and expect to receive USD 1 million in one year from a U.S. client. You can trade at the following prices: Spot rate, Argentinean pesos per dollar ARS 3.02/USD One-year forward rate ARS 3.09 / USD One-year Argentinean interest rate 5.050% One-year dollar interest rate 4.050% (a) Form a forward market hedge. Identify which currency you are buying and which you are selling forward. When will currency change hands? Today? Or in one year? What is the total ARS proceeds that the company will receive in one year? (b) Replicate the payoff on the forward contract with a money market hedge using the spot currency and interest rate markets. Identify each contract in the hedge and the associated cash flows (the strategy). What is the total ARS proceeds that the company will receive in one year? (c) Which hedging strategy should the company implement?

Problem 1: You work for an Argentinean wine exporter and expect to receive USD 1 million in one year from a U.S. client. You can trade at the following prices: (a) Form a forward market hedge. Identify which currency you are buying and which you are selling forward. When will currency change hands? Today? Or in one year? What is the total ARS proceeds that the company will receive in one year? (b) Replicate the payoff on the forward contract with a money market hedge using the spot currency and interest rate markets. Identify each contract in the hedge and the associated cash flows (the strategy). What is the total ARS proceeds that the company will receive in one year? (c) Which hedging strategy should the company implement