Alcoa, a US firm, has entered into a contract to purchase goods from a manufacturer in Germany.
5,000,000 €. The purchase was made in June, with payment due six months later in December.
The following market offers are available:
o Spot exchange rate $1.20/€
o Six-month forward rate $1.21/€
o Euro zone 6-month borrowing rate is 7%.
o Euro zone 6-month deposit interest is 5%.
o US 6-month loan interest rate is 6%
o US 6-month deposit interest rate is 4%

(A)	Calculate a six-month advance bonus/discount for the euro. Show your calculations. (2 points)

(b) If Alcoa chooses to hedge risk in the futures market, will
current rates
be paid in six months, what will be the amount required in dollars to pay the accounts? Show the calculations to support your answer.
(2 points)

(C)	If Alcoa chooses to hedge money market trading, current rates, what will be the dollar amount required to pay the accounts?

Is it paid in six months? Explain the steps and show calculations to support your work.
reply. Would it be better for Alcoa to use a forward hedge or a money market hedge?
(3 points)

(a) forward primi %1,67
(b) 6.050.000 $
(c) 6.029.268 $

Can you show me step by step please. 

Answer rating: 100% (QA)

a To calculate the sixmonth advance bonusdiscount for the euro we need to determine the euros forwar... View the full answer