1. Suppose on July 1^st, 2003, Porsche expected $1 million sales from the U.S. at the end of July.On July 1^st, 2003, the spot exchange rate was $1.1362/, the 30-day forward exchange rate was $1.1400/, and the 60-day forward exchange rate was $1.1450/.Porsche predicted that by the end of July, the spot exchange rate would be $1.1390/ and the 30-day forward exchange rate would be $1.1460/.Porsche also predicted that during August 2003, the U.S. would have a monthly interest rate at 4% and inflation rate at 1%, while Euro zone would have a monthly interest rate at 5% and inflation rate at 3%.Which of the following strategies will generate the most for Porsche at the end of August?

(A)Porsche should hedge the $1 million sales through the 60-day forward contract on July 1^st, 2003.

(B)Porsche should hedge the $1 million sales through the 30-day forward contract on July 31^st, 2003.

Please use this to answer the following questions.

• Nominal = real interest rate +inflation
• Real = Nominal interest rate - inflation