Final answer:
Hedging is a financial strategy that can be used to protect against currency risk. Dayton can calculate the dollar value of its position by multiplying the amount of euros it will receive by the guaranteed exchange rate.
Step-by-step explanation:
Hedging is a financial strategy that can be used to protect against currency risk. In this case, if Dayton wishes to hedge its transaction exposure in the money market, it could enter into a financial contract to guarantee a certain exchange rate in the future.
By doing so, Dayton can eliminate the risk of the euro declining in value against the US dollar and ensure that it receives the same amount of US dollars when the contract is settled.
To calculate the dollar value of the position, Dayton would need to multiply the amount of euros it will receive by the guaranteed exchange rate.
For example, if Dayton will receive 1 million euros and the guaranteed exchange rate is 1 euro = 1.1 US dollars, then the dollar value of the position would be 1 million euros * 1.1 US dollars/euro = 1.1 million US dollars.
When Dayton, a U.S. firm exporting to France, wants to ensure a million euros received in the future is protected against currency fluctuation, it opts for hedging their transaction exposure.
Hedging involves a financial transaction guaranteeing a certain exchange rate at a future date, regardless of market rates.
For calculation, one would need the current exchange rate, the future exchange rate Dayton intends to lock in via the hedging contract, and any associated fees. Without these specific values, a numerical calculation cannot be provided; however, the value in dollars would be the locked-in exchange rate times one million euros, minus any hedging costs.