Question: Use the information for following problem(s). Firm AAA is located in the U.S.. It has purchase from a Germany firm 1,000,000 worth of product. The

  1. Use the information for following problem(s).

    Firm AAA is located in the U.S.. It has purchase from a Germany firm 1,000,000 worth of product. The payable will be processed a year later. Refer to the following for details.

    The current spot exchange rate is $1.40/euro

    The one year forward rate is $1.30/euro

    The Euro zone annual interest rate = 2%

    The U.S. annual interest rate = 3%

    Call options for euro has a strike price $1.38, premium price is $0.02

    Question: If firm AAA chooses to hedge its transaction exposure in the forward market, it will ________ euro forward at a rate of ________.

    sell; $1.30

    sell; euro 1.40

    buy; $1.40

    buy; $1.30

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