Forward hedge overlay for euro

BACKGROUND: A Middle East-based importer of European machinery has an ongoing exposure to euro strength, and has accrued hedges in the first half of this year at an average rate of 1.1000. The amount of hedges accrued is enough to cover estimated import costs through to the end of 2004. The company has an internal budget rate of 1.1200, but, more importantly, it is at risk of losing business to its less-hedged competitors if spot falls too far below its hedge rate.

PROBLEM: The company treasurer

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