You Have Bid for a Possible Export Order That Would

question 101

Essay

You have bid for a possible export order that would provide a cash inflow of €1 million in 1 year. The spot exchange rate is $0.9644/€ and the 1-year forward rate is $0.9503/€. There are two sources of uncertainty: (1) the euro could appreciate to $1.00/€ or depreciate to $0.90/€, and (2) you may or may not receive the export order. Illustrate in each case the profits or losses that you would make if you sell €1 million forward.

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Definitions:

Realistic Conflict Theory

A social psychological model that explains intergroup conflicts, hostility, and aggression as a result of competition over resources or status.

Self-Serving Bias

A common cognitive bias that leads individuals to attribute their successes to internal factors while blaming external factors for their failures, thus preserving their self-esteem.

Overgeneralized Belief

A cognitive bias where an individual applies a general rule too broadly, assuming that it applies in far more situations than it actually does.

Justified

Having, done for, or marked by a good or legitimate reason.