The Estonian company you are working in, expects to receive from its Swedish customer 2.5 million SEK (Swedish Krona) in exactly one year from now. Current exchange rate is 10.1250 EUR/SEK (e.g. 10.1250 SEK per one EUR). The annual market interest rate for SEK is 2% and for EUR 1%.

a. Describe specifically what exchange rate risk the Estonian company faces (e.g. which exchange rate movement would lead to losses) and how this risk can be hedged by using forward contracts.

b. Calculate the one year forward rate for EUR/SEK based on covered interest rate parity.

c. Calculate the hedged value of cash flow in euros for Estonian company