How Should I calculate this the questions?

Are the money markets and forward markets in parity? 

How profitable will the follow-on order be? Would you make this new sale?

 

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Moreno had discussed her concerns about exchange-rate changes with the bank when she had arranged for conversion of the original Novo payment 2 The bank, helpful as always, had described two ways in which Baker could mitigate the exchange risk from any new order: hedge in the forward market or hedge in the money markets. Hedge in the forward market Banks would often provide their clients with guaranteed exchange rates for the future exchange of currencies (forward rates). These contracts specified a date, an amount to be exchanged, and a rate. Any bank fee would be built into the rate. By securing a forward rate for the date of a foreign-currency-denominated cash flow, a firm could eliminate any risk due to currency fluctuations. In this case, the anticipated future inflow of reais from the sale to Novo could be converted at a rate that would be known today. Hedge in the money markets Rather than eliminate exchange risk through a contracted future exchange rate, a firm could make any currency exchanges at the known current spot rate. To do this, of course, the firm needed to convert future expected cash flows into current cash flows. This was done on the money market by borrowing "today" in a foreign currency against an expected future inflow or making a deposit "today" in a foreign account so as to be able to meet a future outflow. The amount to be borrowed or deposited would depend on the interest rates in the foreign currency because a firm would not wish to transfer more or less than what would be needed. In this case, Baker Moreno had discussed her concerns about exchange-rate changes with the bank when she had arranged for conversion of the original Novo payment 2 The bank, helpful as always, had described two ways in which Baker could mitigate the exchange risk from any new order: hedge in the forward market or hedge in the money markets. Hedge in the forward market Banks would often provide their clients with guaranteed exchange rates for the future exchange of currencies (forward rates). These contracts specified a date, an amount to be exchanged, and a rate. Any bank fee would be built into the rate. By securing a forward rate for the date of a foreign-currency-denominated cash flow, a firm could eliminate any risk due to currency fluctuations. In this case, the anticipated future inflow of reais from the sale to Novo could be converted at a rate that would be known today. Hedge in the money markets Rather than eliminate exchange risk through a contracted future exchange rate, a firm could make any currency exchanges at the known current spot rate. To do this, of course, the firm needed to convert future expected cash flows into current cash flows. This was done on the money market by borrowing "today" in a foreign currency against an expected future inflow or making a deposit "today" in a foreign account so as to be able to meet a future outflow. The amount to be borrowed or deposited would depend on the interest rates in the foreign currency because a firm would not wish to transfer more or less than what would be needed. In this case, Baker

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Solution a To calculate the cost or benefit of hedging in the forward market or money markets you would need to consider the following Forward Market ... View the full answer