Hedge the transaction exchange risk

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Reference no: EM131969530

1. If you have debt in a foreign currency due in the future and you want to hedge the transaction exchange risk, you would

Buy the foreign currency forward

Sell the foreign currency forward

Speculate on the possibility to not hedge

Briefly explain your answer

2. UUU is a small US exporting firm. They recently closed a sales worth EUR 7 million and they are scheduled to receive this sum in 90 days. The EURUSD spot rate is 1.20 and the 90 day forward rate is 1.18.

What is the nature of UUU’s transaction exchange risk?

Assume that UUU decides to hedge the risk with forwards. What position would they enter? What would be the cost today of this hedging strategy?

What is the minimum dollar revenue that UUU will receive if they hedge with forwards? What is the minimum if, instead, they don’t hedge?

Reference no: EM131969530

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