Section 1: The Basics of Hedging A small German firm bought a patent from a British firm and will make a payment of 1 million British pounds in 90 days. This German firm conducts its business operations primarily in euros. It does not hold any other assets or liabilities in British pounds 1. Is this firm exposed to exchange rate risk? 2. Does it hold a long position or a short position in pounds? 3. What kind of fluctuation in the exchange rate Et (expressed in / ) could increase the firm's cash outlay (denominated in euros)? 4. What does hedging mean? 5. Assume that the euro is the domestic currency. The current spot exchange rate Et is 1.17/. Is this exchange rate expressed using the direct quote or the reverse quote? 6. The current 90 -day forward exchange rate Ft+1 is 1.20/. How could the German firm hedge its exchange rate risk exposure? What is the amount of the forward contract (in euros)