Plains States Manufacturing has just signed a contract to BUY an agricultural equipment from Boschin, a German firm, for €1,250,000. The transaction was made in June with payment due in 30 days. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk. To help the firm make a hedging decision you have gathered the following information.(20 points) ο The spot exchange rate is $1.065/€ (it means one Euro can be exchanged for US$1.065) ο The one month forward rate is $1.048/€ ο The Euro zone interest rate is 6.5% ο The U.S. interest rate is 5%
a. If Plains States chooses to hedge its transaction exposure in the forward market, it will __________ €1,250,000 forward at a rate of __________. If Plains States chooses to hedge its transaction exposure in the forward market at the available forward rate. How much will it pay in US$ in 30 days?
b. Plains States could hedge the FX risk in the money market. If it chooses the money market hedge, how much would it cost in US$ in 30 days?
c. Which hedge strategy will you recommend Plains States to use?