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ABC Co just sold a ship to Ship France, Inc

Finance

ABC Co just sold a ship to Ship France, Inc. ShipFrance will be billed €20.14 million payable in one year. The current spot exchange rate is $1.09/€ and the one-year forward rate is $1.12/€. The annual interest rate is 8 percent in the United States and 7 percent in France. ABC Co is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.

a. It is considering two hedging alternatives: Money Market hedge or forward hedge. Which alternative would you recommend?

b. Other things being equal, at what forward exchange rate would ABC Co. be indifferent between the two hedging methods?

Option 1

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