The spot exchange rate and forward exchange rate

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Suppose on July 1st, 2003, Porsche expected $1 million sales from the U.S. at the end of July. On July 1st, 2003, the spot exchange rate was $1.1362/€, the 30-day forward exchange rate was $1.1400/€, and the 60-day forward exchange rate was $1.1450/€. Porsche predicted that by the end of July, the spot exchange rate would be $1.1390/€ and the 30-day forward exchange rate would be $1.1460/€. Porsche also predicted that during August, 2003, the U.S. would have a monthly interest rate at 4% and inflation rate at 1%, while Euro zone would have a monthly interest rate at 5% and inflation rate at 3%. Which of the following strategies will generate the most € for Porsche at the end of August? (A)Porsche should convert the $1 million to € right away at the end of July. (B)Porsche should hedge the $1 million sales through the 30-day forward contract on July 1st, 2003. (C)Porsche should hedge the $1 million sales through the 60-day forward contract on July 1st, 2003. (D)Porsche should hedge the $1 million sales through the 30-day forward contract on July 31st, 2003.

Reference no: EM131049689

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