Reference no: EM132960833

Question - The Gaia Farm, located in the Blue Ridge Mountains of Western North Carolina, is an old-line producer of herbs, seasonings, and medicines. Its products are marketed all over the United States and in many parts of continental Europe as well. Gaia Herbs generally invoices in US dollar when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order from a large wholesaler in central France for $ 5,000,000 of its product, conditionally upon delivery being made in three months' time and the order invoiced in euros. Gaia's controller, Joeie Clark, is concerned with whether the dollar will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. Clark thinks this an unlikely possibility, but decides to contact the firm's banker for suggestions about hedging the exchange rate exposure.

Clark learns from the banker that the current spot exchange rate in €/$ is € 0.830963; thus the invoice amount should be the figure of € 4,154, 815. Clark also learns that the three-month's forward rates for the dollar and the euro versus the pound are £ 0.720705/$1.00 and £ 0.870295/€1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for dollar based on the €/$ forward cross-exchange rate implicit in the forward rates against the dollar. What would you do if you were Clark?