Suppose that on Jan. 1, GE was awarded a contract to supply turbine blades toLuthansa. On Dec. 31, GE would receive payment of Euro10 million for these blades. Themoney market interest rates and foreign exchange rates are given as follows:U.S. interest rate 10% per annumEuro interest rate 15% per annumSpot exchange rate $1/EuroForward exchange rate $0.957/Euro (one-year maturity)
question: Explain the strategy and calculate the hedged value of GE’s cash flow using a moneymarket hedge.
To receiveUS interest rateEuro interest$/EuroFrward 1) To hedge sell Euro forwards at 0.957 2) Sell euro forwards at 0.957At maturity receive 10 million Euro10%15%10.957 9.57 million $