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Foreign exchange currency risk

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Suppose a us 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 goods are received). The rising US deficit has caused the dollar to depreciate against the franc recently. The current exchange rate is 5.60 FF per us dollar. The 90 days forward rate is 5.45 FF/ dollar. The firm goes into the forward market today and buys enough French francs at the 90 day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 French francs per us dollar. How much in US dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

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The solution calculates the savings made by a firm due to elimination of foreign exchange currency risk with its forward market hedge.

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Suppose a us 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 goods are received). The rising US deficit has caused the dollar to depreciate against the franc recently. The current exchange rate is 5.60 FF per us dollar. The ...

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