Company needs to make a payment of e100000 to a european, Finance Basics

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Company needs to make a payment of e100000 to a european

Company needs to make a payment of e100,000 to a European supplier in three months. The current spot exchange rate is $1.14/e and the three-month forward rate is $1.03/e. The annual interest rate is 1.0% in the U.S. and 4.5% in Europe.

a) Describe the currency risk your company faces.

b) There are two ways that you can completely hedge your currency risk today. Buy the forward, or buy the foreign currency right now in the spot market. Which option is better for your company?

c) At what forward rate are you indierent between the two strategies

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Finance Basics: Company needs to make a payment of e100000 to a european

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