Question: You work for an Argentinian importer and expect to pay 1 million in one year to a European supplier. You can trade at the following

You work for an Argentinian importer and expect to pay €1 million in one year to a European supplier. You can trade at the following prices:
Spot rate, Argentinean australs per euro AA24.38/€
One-year forward rate AA24.96/€
One-year Argentinean interest rate 5.050%
One-year euro interest rate 4.050%
a. Form a forward market hedge. Identify which currency you are buying and which you are selling forward. When will currency change hands? Today? Or in one year?
b. Replicate the payoff on the forward contract with a money market hedge by using the spot currency and Eurocurrency markets. Identify each contract in the hedge.
c. Are quoted prices in these currency and Eurocurrency markets in equilibrium? If not, how would you arbitrage the disequilibrium?

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