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Suppose a U.S. firm buys $100,000 worth of wine fr...

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Suppose a U.S. firm buys $100,000 worth of wine 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 5.55 Euros per U.S. dollar (fantasy world, indeed!). 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? You will receive 5 points each for correctly calculating the cost of the obligation, the cost of the forward contract, the cost of the spot rate in 90 days, and for calculating the savings of the firm

 

Paper#10108 | Written in 18-Jul-2015

Price : $25
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