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Describe the positions that she should take to hedge

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Today is August 20th, the CFO of a corporation (based in Italy) knows that the company will receive $5 million USD in four months, will receive 2.5 million pounds (sterling) in two months, and will pay 200 million Yen in three months. She wants to hedge, so she calls her contact at the bank and enters into several forward contracts immediately. (note: Italy's domestic currency is the Euro)

a. Describe the positions that she should take to hedge exchange rate risk? Draw the payoff profiles for the unhedged positions and the forward contracts.

b. If the Euro appreciates over the life of each contract, what will happen to the company's cash flows when each contract matures? Clearly state what assumptions you are making / have made.

c. If the Euro depreciates over the life of each contract, what will happen to the company's cash flows when each contract matures? Clearly state what assumptions you are making / have made.

Reference no: EM132999273

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