GE, a US firm, has purchased car transmission parts from Fiat, an Italian car manufacturer,...
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Accounting
GE, a US firm, has purchased car transmission parts from Fiat, an Italian car manufacturer, with 10 million payable in one year. Current spot exchange is 1.6 $/ and 1 year forward rate is 1.65 $/. Assume the one-year dollar interest rate is 6.0% and one-year euro interest rate is 5%.
A. If GE uses the money market hedge, what the steps are and what the total cost for the 10 million euro will be?
B. Comparing the money market hedge outcome with the forward contract, do you think GE should go with the money market hedge?
C. If call options on the euro with a strike price of $1.65 is sold at the option premium of $0.01 per euro and at maturity, the exchange rate is $1.70, what is the net cost?
D. What is the effective exchange rate?
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