Question
Suppose that your firm is a U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have
Suppose that your firm is a U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of 100,000 to your German supplier. Today's spot exchange rate is 1.00 = $1.20; the one-year forward rate is 1.00 = $1.15. How can you fix the dollar cost of this order? Select one: a. Since the spot price is more than the forward price, you should trade your dollars for euros today and pay your supplier early. b. Sell a call option on the euro with a one-year maturity. c. Enter into long position in the one-year euro futures contract at 1.00 = $1.15. This will fix the cost of 100,000 at $115,000. d. Enter into short position in the one-year euro futures contract at 1.00 = $1.15. This will fix the cost of 100,000 at $115,000.
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