Question
You are a car dealer in Kirksville and import Mercedes-Benz from Germany. You have just signed a deal to import 100 cars. The deal is
You are a car dealer in Kirksville and import Mercedes-Benz from Germany. You have just signed a deal to import 100 cars. The deal is denominated in Euros, and you will pay 5,000,000 when the cars arrive in Kirksville in 90 days. Assume that you can borrow and lend at 6% p.a. in U.S. dollars and at 10% p.a. in Euros. Both interest rate quotes are for a 360-day year. The spot exchange rate is $1.36/, and the 90-day forward exchange rate is $1.32/. It is known that there are a couple of ways to hedge your foreign currency liability: forward hedge and money market hedge. Which hedge should be preferred for you? Show all the details.
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