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Calculating Forward contract value for foreign Exchange

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Today spot rate £ 1 = US $ 2
3-month forward rate £ 1 = US $ 2.10
After 3-month spot rate £ 1 = US $ 2.20

US importer needs £ 1million payment 3-months later, and he sign a forward contract today

a. How much (US$) does the importer need to pay after 3 months?
b. How much is the cost of hedge?
c. Better sign a forward contract today or not sign a forward contract today? Why?

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Solution Summary

Solution explains whether a importer should sign a forward contract to safeguard against foreign currency fluctuations or not.

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Today spot rate £ 1 = US $ 2
3-month forward rate £ 1 = US $ 2.10
After 3-month spot rate £ 1 = US $ 2.20

US importer needs £ 1million payment 3-months later, and he sign a forward contract today

a. How much (US$) does the importer need to ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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