If the spot rate for Euro is .91 Euro is equal to 1 US $, and the annual interest rate on fixed rate one-year deposits of Euro is 3.5% and for US$ is 2.5%, what is the nine-month forward rate for one Euro in terms of dollars? Assuming the same interest rates, what is the 18-month forward rate for one dollar in Euros? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, will the Euro get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations in the Euro-zone compared to the US? On January 2d, 2016, Microsoft is shipping 1,500,000 new X-Boxes from its US plant, which it will sell through EU dealers on 270-day terms at 350 Euro each. So Microsoft will receive payment from its dealers on September 28th, 2016. Assuming that Microsoft needs to cover its expenses in the US and thus wants to hedge its Euro/US$ exposure using a forward contract with a US bank, what is the minimum amount of US dollars they should receive on September 28th, 2016 given the 9-month forward rate for one Euro in terms of US dollars that you calculated in problem one? What are two other ways Microsoft could hedge their Euro/US$ exposure?
This question was answered on: May 23, 2022
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