Forward market hedge
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Suppose a U.S. firm buys $200,000 worth of television tubes 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 5.50 Euro per U.S. dollar(in a fantasy world?!). The 90-day forward rate is 5.45 Euro/dollar. 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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Solution Summary
Calculates the savings that a firm manages using a forward market hedge.
Solution Preview
See attached file.
Value of imports= $200,000
Current Spot rate= 5.50 Euro/dollar
Therefore, amount in Euros to be paid after 90 days= 1,100,000 Euros =200,000. x ...
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