Question 1 Nebraska Co. engages in numerous foreign currency transactions as part of its operations. Nebraska is situated in the USA and is expecting to pay 500,000 euros in 3 months time and to receive 800,000 euros in 6 months time to and from a European customer. The current spot rate is $1 = 2.248 2.359 euros.The 3 month forward rate is $1= 2.378 2.402 euros. The 6 month forward rate is $1 = 2.414 - 2.456 euros. The following commercial interest rates are available to Nebraska Co. from the money markets. Deposit Rate Borrow Rate Euros 2.5% 5.5% Dollars 1.5% 2.5% Nebraska has no surplus cash available and will need to hedge the future euro payment and receipt. Required: (a) Evaluate whether a money market hedge or a forward market hedge would be preferred on financial grounds by Nebraska Co. for both the month payment and the 6 month receipt. [20 marks] (b) Explain and evaluate the International Fisher Effect and what role it plays in determining exchange rates. [15 marks]