Today, April 1st, Brady Corporation signed a contract to sell some of its specialized filters to a Brazilian firm named Jato. Jane, the CFO of Brady Corp. was pleased with the sale, as she was looking forward to paying down some of the $ 200,000 balance on the firm's line of credit borrowings. However, Jane was concerned about the possible fluctuations in the exchange rate between the dollar and the Brazilian Real, as Jato insisted to be invoiced and to pay in Brazilian Real.

Jato agreed to purchase a total of 2,000 filters for R$ 200/filter. The terms of the order were such that Jato would pay Brady Corp. thirty (30) days after receiving the filters. Given manufacturing delays, Brady Corp. expected the filters to be received by Jato exactly sixty (60) days from today.

Brady Corporation could get a forward contract with their bank to either sell or purchase Brazilian Real on July 1stat the forward rate of R$ 5.10/$. The bank also offered to lend Brazilian Real to the Brady Corporation at 16% per year (or 4% per 3 months).

• The following quotes are available:
• The spot exchange rate is R $5.0000/$
• Expected future spot exchange rate for July 1stR $ 5.40/$
• Brady Corporation's line of credit borrowing rate is 7% per year (or 1.75%
• for 3 months)
• The Brazilian real 3-month lending rate is 12% per year (or 3% for 3
• months)
• The U.S dollar. 3-month lending rate is 4% per year (or 1% for 3 months)
• Brady Corporations' cost of capital is 16% per year (or 4% for 3 months)

Part a:Calculate the receipt/costs of hedging with the forward and money market alternatives.

Part b:What hedge will Brady Corporation pick? (