SUPPOSE THAT YOUR FIRM IS A U.S.-BASED IMPORTER OF GERMAN AUTOMOB...

103. Suppose that your firm is a U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate is €1.00 = $1.50; the one-year rate of interest in the U.S. is 4 percent and in Germany it is 6%. What trades in the spot foreign exchange market and in the money market will allow you to fix the dollar cost of this order? a. Exchange $150,000 for €100,000 at today's spot rate. In twelve months, pay your supplier. b. Exchange $141,510 for €94,340 at the spot rate of €1.00 = $1.50. Invest the euros at i€ = 6%. In one year your investment will be worth €100,000 which is enough to pay your supplier. If you're short of cash today, borrow the $141,510 at i$ = 4 percent. c. Sell euros forward at the exchange rate expected to prevail in one year d. None of the above are correct.