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How much did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

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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?

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https://brainmass.com/business/foreign-exchange-rates/300214

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 ...

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.

$2.19