Consider the situation of Example 12.10. Rather than shorting a futures contract, the U.S. firm could borrow \(500 /\left(1+r_{G}\right)\) euros (where \(r_{G}\) is the 90-day interest rate in Germany), sell these euros into dollars, invest the dollars in T-bills, and then later repay the euros loan with the payment received for the German order. Discuss how this procedure is related to the original one.

Data from Example 12.10

A U.S. electronics firm has received an order to sell equipment to a German customer in 90 days. The price of the order is specified as 500,000 euros, which will be paid upon delivery. The U.S. firm faces risk associated with the exchange rate between euros and U.S. dollars.
The firm can hedge this foreign exchange risk with four euros contracts (125,000 euros per contract) with a 90-day maturity date. Since the firm will be receiving euros in 90 days, it hedges by taking an equal and opposite position now—that is, it goes short four contracts. (Viewed alternatively, after receiving euros, the firm will want to sell them, so it sells them early by going short.)