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Your firm is a U.S.based exporter . You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm ( in
- Your firm is a U.S.based exporter. You have sold 1,000,000 worth of toys to an Italian firm. Payment from the Italian firm (in ) is due in 1 year. Your firm wants to hedge the receivable. The one-year interest is 5% in the U.S. and 2% in the euro zone. The spot exchange rate is $1.40/ .
- Consider the money market hedge.
- Figure out the present value of the receivable in euros. (20points)
- Figure out your action. In other words, do you need to borrow or invest the present value of the receivable in the Eurozone now? (20points)
- Figure out the future value of the receivable in dollars. (30points)
- Consider the forward market hedge. Do you take a long or short portion for the receivable? (20points)
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