You are a U.S. exporter concerned about your transaction exposure on a recent sale to an

importer in Germany. The invoice, just sent, is for 500,000 euros payable in 60 days, which will

be about mid-February. The current exchange rate is $1.00 per euro, and you fear that the dollar

will appreciate against the euro due to the rebound in the domestic economy and the improvement

in the economy with potentially increasing interest rates. The 60-day forward rate is $.99.

a. What is the value of the invoice in dollars at the current spot rate?

b. If a forward contract is sold, what will be the value of the invoice in dollars at the forward

rate?

c. What are the advantages and disadvantages of hedging the transaction with a forward

contract?

d- What is the difference between transaction exposure and translation exposure?

e- Define the following: default risk, liquidity risk, reinvestment-rate risk, price risk, event risk.