please see the attached file.

A leader in your firm has been studying the foreign exchange market for a number of years and believes that she can predict several of the foreign currency exchange rates relative to the U.S. dollar. The firm has $300,000 to invest in the spot, forward, or options markets. The spot rate is $1.2622 to the euro, and in 12 months, the forward rate is $1.2905 to the euro. However, this leader is sure that the exchange rate in 12 months will be $1.33 to the euro. Explain how she can speculate on the belief that the euro will be $1.33 in 12 months. Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved.

Spot rate = $1.2622 / Euro
12-month forward= $ 1.2905 / Euro (in the forward market)
Expected 12 month forward rate = $ 1.33 / Euro

If the expected 12 month forward rate is going to be $ 1.33 / Euro, then the forward Euro is undervalued when compared with the spot Euro, as 1 Euro should buy $1.33 dollars after 12 months whereas, it is actually buying only $ 1.2905 in the forward market. (This is the same as saying that the Forward dollar is overvalued when compared with the spot dollar).

To make profit, sell dear and buy cheap. That is, sell Euros for dollars in the spot market and buy Euros from dollars in the forward market.
The company already has dollars; therefore, there is no need to convert Euros to dollars in the Spot market.

Buy Euros forward.
($ 30,000 will buy 30,000/ 1.2905 = 23,246.80 Euros in the forward market.) Therefore enter into a 12 month forward contract to purchase 23,246.80 Euros at the end of 12 months at a rate of $1.2905 / Euro. This locks in the price.
At the end of 12 months use the forward contract to sell $30,000 and get Euros 23,246.80 (at the contracted rate of $1.2905/Euro). If the exchange rate (spot rate) at the end of 12 months is $1.33 / Euro (as expected), sell the Euros 23,246.80 in the market and get $ (23,246.80 x 1.33) = $30,918.

Amount of profit= $ 30,918- $ 30,000 = $918
% return = ($918 / $30,000) x 100 = 3.06%

All of the terms and paperwork necessary to export products and services can be very confusing. Please explain the advantages and disadvantages associated with using a letter of credit, a bill of exchange (or draft), and the Export-Import Bank of the United States.

Letter of Credit (LOC) is a bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents

Draft (or Bill of Exchange) is an unconditional order in writing from one person (the drawer) to another (the drawee), directing the drawee to pay a specified amount to a named payee at a fixed or determinable future date.
In international trade Drafts (Bill of Exchange) is a written order of exporter, telling an importer to pay a specified amount of money at a specified time.

Export-Import Bank (Ex-Im Bank) is a U.S. government agency created to facilitate U.S. trade relations primarily through providing financing, insurance, and feasibility studies.

1) Letters of Credit (L/C) are the means by which the majority of international transactions occur. This is a letter written to the seller, signed by the buyer's bank. It promises to honor drafts drawn on the bank, if the seller follows the rules set in the letter, which are usually the same as in the purchasing contract. If they are different, both conditions apply.

L/C are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents. The importer pays the issuing bank the amount of the L/C plus associated fees. Commercial or import/export L/Cs are usually irrevocable. The required documents typically include a draft (sight or time), a commercial invoice, and a bill of lading (receipt for shipment).

- Time of payment : When shipment is made
- Goods available to buyers : After payment
- Risk to exporter : Very little or none
- Risk to importer : Relies on exporter to ship goods as described in documents

Advantages of L/Cs:

- They eliminate Credit Risk, if the bank is in good standing
- They reduce uncertainty for payment, because the seller knows all the rules for obtaining payment
- They stabilize production by assuring payment before a production run begins
- They facilitate financing because they assure a ready foreign buyer

2) Drafts (Bills of Exchange):
- These are unconditional promises drawn by the exporter instructing the buyer to pay the face amount of the drafts.
- Banks on both ends usually act as intermediaries in the processing of shipping documents and the collection of payment.
- In banking terminology, the transactions are known as documentary collections. The Documentary Collection is a payment mechanism that allows exporters to retain ownership of goods until they receive payment or are reasonable certain they will receive it. These documents are generally titles to the goods.
- There are two kinds of drafts: Sight drafts and Time Drafts

a) Sight Drafts: Sight drafts (documents against payment): When the shipment has been made, the draft is presented to the buyer for payment.
- Time of payment : On presentation of draft
- Goods available to buyers : After payment
- Risk to exporter : Disposal of unpaid goods
- Risk to importer : Relies on exporter to ship goods as described in documents

b) Time Drafts: Time drafts (documents against acceptance): When the shipment has been made, the buyer accepts (signs) the presented draft.
- Time of payment : On maturity of draft
- Goods available to buyers : Before payment
- Risk to exporter : Relies on buyer to pay
- Risk to importer : Relies on exporter to ship goods as described in documents

3) Export-Import Bank (Ex-Im Bank): This government agency aims to finance and facilitating the export of U.S. goods and services and maintain the competitiveness of U.S. companies in overseas markets. It offers guarantees of commercial loans, direct loans, and export credit insurance.