Currency Hedge Forward Rate: BMW Example
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On January 2nd, 2011, BMW expects to ship 19,000 Mini-Cooper cars from its affiliated plant in the UK to the US, which it will sell through US dealers on 300-day terms at $26,500 each. So, BMW will receive payment from its dealers on October 28th, 2011.
Assuming that BMW needs to cover its expenses in the UK, and thus wants to hedge its pound exposure using a forward contract with a UK bank in the US, what is the minimum amount of pounds they should receive on October 28th, 2011 given the ten month forward rate for one US dollar in terms of pounds? What are two other ways BMW might hedge their pound/dollar exposure?
Ten month forward rate is 1 Pound = $1.754
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Solution Summary
Provides a solution for how a company can hedge their currency exposure through multiple methods.
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Solution:
Hedge Using Forward Contract:
Amount receivable by BMW ($26,500*19,000 mini-cooper cars) = $503,500,000
Ten month forward rate is £1 (pound) = $1.754
Amount received on October 28, 2011 in pounds = £287,058,153 ...
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