Microsoft corporation CFO wants you to recommend a hedging strategy to manage the risk associate with a large transaction the company is about to engage in with a customer in Brazil.  The details of the transaction are below.  Be sure to describe what specific strategies you would use (option, future, forward contract, etc.), why that is the most effective option and the specifics of the tool you will use (e.g. duration, strike price, price, which currency you are hedging, etc.).

• Microsoft corporation is selling a $10M piece of equipment to its best customer in Brazil.
• The customer has asked for terms on the purchase that includes a $10M balloon payment in 2 years.
• The customer's native currency is the Real.

Microsoft corporation wants to hedge the balloon payment in 2 years. Use the most recent exchange rate as your starting point and use Forex as you're your pricing guide if necessary.

Answer rating: 100% (QA)

As the CFO of Microsoft Corporation I recommend hedging the balloon payment using a forward contract A forward contract is an agreement between two pa... View the full answer