Suppose that on Jan. 1, GE was awarded a contract to supply turbine blades to Luthansa. On Dec. 31, GE would receive payment of Euro10 million for these blades. Themoney market interest rates and foreign exchange rates are given as follows:U.S. interest rate 10% per annum, Euro interest rate 15% per annum, Spot exchange rate $1/Euro, Forward exchange rate $0.957/Euro (one-year maturity)
(a) Explain the strategy and calculate the hedged value of GE's cash flow using a forward market hedge.
(b) Explain the strategy and calculate the hedged value of GE's cash flow using a money market hedge.