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3. (20 points) A British forestry firm based in the U.K. made a large purchase of equipment from an American firm. The equipment includes a variety of agricultural machinery, landscaping machinery, and high-tech construction equipment. The cost of the equipment was partially paid at the time of the purchase, while the remainder will be paid in 6 months. For the forestry firm, this created a payable of $230,000,000 due in 6 months. The following quotes are available to the company:

Bid and ask quotes for the current spot rate (dollars per one pound) $1.320/ and $1.340/

Bid and ask quotes for the 6-month forward rate (dollars per one pound) $1.290/ and $1.350/

Dollar interest rate offered on deposits 2.00% per year

Pound interest rate offered on deposits 3.00% per year

Dollar denominated borrowing rate 4.00% per year Pound denominated borrowing rate 5.00% per year

The company is considering two alternative ways to fully hedge the exchange rate risk associated with the payable (a "forward hedge" and a "money-market hedge").

(a) (5 points) What are the transactions that the company would make to implement the forward hedge? Describe each transaction including the amounts, currencies, and timing of every cash flow involved in it.

(b) (12 points) What are the transactions that the company would make to implement the money-market hedge? Describe each transaction including the amounts, currencies, and timing of every cash flow involved in it.

(c) (3 points) Calculate which of the two is preferable if the company uses a Weighted Average Cost of Capital (WACC) rate of 6.0% to discount future cash flows

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