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As a manager of an Italian clothing manufacturer, you are interested in buying a new high-speed production machine. There are two different companies – both based in the US – that sell this (identical) machine. Company A sells it for $10,900, payable in three months. Company B leaves it up to you if you want to pay in $ or in €. Their price is either $10,800 or €10,000, payable in three months.
a) Suppose you buy the machine from Company B. Characterize the foreign exchange exposure that Company B has acquired through this deal.
b) If you have decided to buy from Company B, and the spot exchange rate in three months turns out to be $1.1/€, which currency would you choose for the payment?
c) Suppose that the current rate of a three-month forward is $1.095/€. Does this information help you to decide whether to buy from A or from B? If yes, what is your decision? If no, what type of (publicly available) information would help you to make a decision?
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