The Estonian company Masinavrk AS is preparing a preliminary contract to supply an equipment to a US factory. According to the agreement, the equipment will be delivered in exactly two years, and the Estonian company will then expect to receive 4.35 million dollars for the equipment. Masinavrk AS is concerned about the possible currency risk while concluding this agreement. The current spot exchange rate is 1.235 EUR/USD.

a) Explain the nature of exchange rate risk is in this example. Be precise!

b) Based on the course materials, with what type of exchange rate risk the Estonian company is dealing with? Why?

Let us now assume that the annual US dollar interest rate is 3.1% and at the same time the Euro interest rate is 1.35%. We can expect interest rates to remain stable over the next two years.

c) Find the EUR/USD forward rate for two years and explain how the forward contract can be used in this example to hedge the currency risk?

d) What will be the value of the supplied equipment in euros in two years, taking into account the forward exchange rate?

#please answer the question within 50 minutes written here will be approchate.....