Navarro's first shipment of product to Spain was

upcoming. The first shipment would carry an intracompany

invoice amount of $500,000. The company

was now trying to decide whether to invoice the

Spanish subsidiary in U.S. dollars or European euros,

and in turn, whether the resulting transaction expo

sure should be hedged. Ignacio's idea was to take a

recent historical period of exchange rate quotes and

movements and simulate the invoicing and hedging

alternatives available to Navarro to try and charac

terize the choices.

Ignacio looked at the 90-day period which had ended

the previous Friday (standard intra-company pay

ment terms for transcontinental transactions was

90 days). The quarter had opened with a spot rate

of $1.0640/, with the 90-day forward rate quoted at

$1.0615/ the same day. The quarter had closed with

a spot rate of $1.0980/.

a. Which unit would have suffered the gain (loss)

on currency exchange if intra-company sales were

invoiced in U.S. dollars ($), assuming both com

pletely unhedged and fully hedged?

b. Which unit would have suffered the gain (loss)

on currency exchange if intra-company sales were

invoiced in euros (), assuming both completely

unhedged and fully hedged?