A Firm Has a Legal Obligation to Pay FFr5 Million

question 40

Essay

A firm has a legal obligation to pay FFr5 million one year from now and is wondering how it can hedge the exchange risk. The spot exchange rate is FFr5.5/$ and the 1-year forward rate is FFr5.6/$. The 1-year U.S. interest rate is 5% and the French rate is 5.5%. What do you suggest?

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