Rockport, an Australian retail company, just signed a contract to sell some product to Casket, a German company. Casket will be billed $10 million which is payable in one year. The current spot exchange rate is AUD1.30/EUR and the one0year forward rate is AUD1.45/EUR. The annual deposit interest rate is 8.0% in Australia and 4.0% in Germany. Rockport 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 alternatives would you recommend? Why?

(b) Other things being equal, at what forward exchange rate would Rockport be indifferent between the two hedging methods?

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 AUD/EUR and how should the company react to such change, if any.