How much did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
Not what you're looking for?
Suppose a U.S. firm buys $400,000 worth of electronic components from a French manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the Euro recently. The current exchange rate is 5.60 Euro per U.S. dollar. The 90-day forward rate is 5.45 Euro/dollar (in a fantasy world!). The firm goes into the forward market today and buys enough Euros at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Euros per U.S. dollar.
How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
Purchase this Solution
Solution Summary
The solution explains how to calculate the savings by hedging using forward rate. It is about 100 words and calculates the obligation of the firm, amount of dollars needed for the obligation, and the dollar value of the obligation in order to determine how much the company saved.
Solution Preview
The obligation of the firm in terms of Euro would be at the current spot rate since the transaction has taken place today. The obligation of the ...
Purchase this Solution
Free BrainMass Quizzes
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.