Athletic Shoe Company sells to a wholesaler in Freedonia. The purchase price of
a shipment is 50,000 Freedonian marks with terms of 90 days. Upon payment Zike
will convert the marks to dollars. The present spot rate for marks per dollar
is 1.71, whereas the 90-day forward rate is 1.70.
a. If Zike
were to hedge its exchange-rate risk, what would it do? What transactions are
b. Is the
mark at a forward premium or at a forward discount?
c. What is
the implied differential in interest rates between the two countries? (Use
interest-rate parity assumptions.)
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