1. Companies may be affected by changes in the nominal exchange rate or in the real exchange rate. Explain how this can occur. Which risks are easiest to hedge against? 2. A Ford dealer in the United...

1. Companies may be affected by changes in the nominal exchange rate or in the real exchange rate. Explain how this can occur. Which risks are easiest to hedge against?

2. A Ford dealer in the United States may be exposed to a devaluation of the yen if this leads to a cut in the price of Japanese cars. Suppose that the dealer estimates that a 1% decline in the value of the yen would result in a permanent decline of 5% in the dealer’s profits. How should she hedge against this risk, and how should she calculate the size of the hedge position? ( Hint: You may find it helpful to refer.)