Based on what you’ve learned in your speculation steps through. Describe how you would use for ex forward markets to HEDGE currency risk for an export or import transaction worth $1,000,000. For example, how would you hedge currency risk being a US exporter of bourbon or importer of autos? Assume that the time gap between the signing of your trade contract and payment is three months and that during that period a foreign currency in question experiences a major unexpected appreciation or depreciation (say, 10-20%).
Assume that the 3-month forward rate for a foreign currency is equal to its spot rate. Describe your choices for hedging and provide estimates of its benefits and costs. Express the costs of hedging as a percentage of the total volume of your export/import transaction and in $$. For a forward contract assume the upfront fee of 1.5%, for an option assume a fee of 3-4%. If you need to use data for interest rates, use the US prime rate vs. the equivalent rate of a foreign country.
