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You are the treasurer of a U.S. firm that has a €1 million commitment due to a German firm in 90 days. The current spot rate is $1.00 per euro. Ms. A forecasts that the spot rate in 90 days will be $1.01 per euro. Ms. B forecasts that the spot rate will be $1.12 per euro. The 90-day forward rate is $1.11 per euro and the actual spot rate in 90 days turns out to be $1.10 per euro.
1. Who's forecast is more accurate? Ms. A or Ms. B ?
2. If you follows Ms. A's forecast, what will you do today on the foreign exchange market? Howmuch will your firm's €1 million commitment turn out to be in dollars. Explain.
3. If you follows Ms. B's forecast, what will you do today on the foreign exchange market? Howmuch will your firm's €1 million commitment turn out to be in dollars. Explain.
4. Based on your answers for (2) and (3), who's forecast is actually better for your firm? Explain
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