You just contracted to purchase one million pounds of sugar from Brazil to be delivered in 3 months. You must pay for the sugar in Brazilian reals when the shipment arrives. You are concerned that the cost of reals may increase against the dollar and this increase could be costly for your firm. Set up a hedge that will protect your firm if you are paying $0.25 per pound for the sugar at the current spot rate of $1 U.S. equals 1.10 reals, and you can buy a futures contract that locks in an exchange rate of $1 U.S. equals 1.105 reals.

b. What would the 1-year forward rate be if inflation in the United States is 3%, inflation in France is 8%, and the current spot exchange rate is $1 equals 6 francs? Is the U.S. dollar appreciating or depreciating against the franc?