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A U.S. importer makes a purchase from a German firm in the amount of 21,000 euros. At the current spot rate of 0.75 euros per dollar, how much is this purchase in U.S. dollars? Next, consider that this U.S firm will not have to pay the German firm for 90 days and that the U.S. firm is concerned that the dollar might weaken over this 90-day period. Suppose the U.S. firm completes a forward hedge at the 90-day forward rate of 0.725 euros per dollar. If in 90 days the dollar weakens so that the spot rate is 0.70 euros per dollar, how much of a loss (in dollars) will the U.S. firm have avoided by hedging its exchange rate exposure?

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Lelia Lubowitz
Lelia LubowitzLv2
30 Sep 2019

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Related questions

8)When a company needs to purchase foreign currency for immediate delivery today 2 days to pay its foreign vendor for merchandise the company will purches the FX from its bank at the

a) Future price

b) Forward price

c) Spot price

d) West side price

9. If a U.S. firm desire avoid the risk from exchange rate fluctuations, and it is receiving 100.000 euros in 90 days from a customer in France, it could

A) Obtain a 90-day forward purchase contract on euros.

B) Obtain a 90-day forward sale contract on euros

C) Purchase euros 90 days from now at the spot rate,

D) Sell euros 90 days from now at the spot rate

10. According to the Madura to 1971, the exchange rate between any two currencies was typically:

A) Fixed within narrow boundaries.

b) Floating, but subject to central bank intervention.

C) Floating, and not subject to central bank intervention.

D) Nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.

PLEASE ANSWER ALL QUESTIONS!!!

Spot and forward rates

Anderson Australian Imports has agreed to purchase 15,000 cases of Australian beer for 5 million Australian dollars at today's spot rate. The firm's financial manager, Linda Wilson, has noted the following current spot and forward rates:

U.S. Dollar/Australian
Dollar		 Australian Dollar/U.S.
Dollar
Spot 1.0759 0.9295
30-day forward 1.0718 0.9330
90-day forward 1.0631 0.9406
180-day forward 0.9276 1.0781

On the same day, Wilson agrees to purchase 15,000 more cases of beer in 3 months at the same price of 5 million Australian dollars.

What is the price of the beer in U.S. dollars if it is purchased at today's spot rate? Round your answer to the nearest cent.
$

What is the cost in U.S. dollars of the second 15,000 cases if payment is made in 90 days and the spot rate at that time equals today's 90-day forward rate? Round your answer to the nearest cent.
$

If the exchange rate for the Australian dollar is 0.9123 to $1 in 90 days, how much will Wilson have to pay for the beer (in U.S. dollars)? Round your answer to the nearest cent.
$

A U.S. firm will need £100,000 in 90 days to pay for British imports. The firm tries to hedge this transaction using a forward contract. We know the following information:

*Spot exchange rate: £1=$1.38.

*90-day forward exchange rate: £1 = $1.40 .

(a) Should this firm buy or sell a £ forward contract if it wants to eliminate the uncertainty of the dollar payment for this accounts payable (A/P)?

(b) If management's forecast of the spot rate 90 days later is:

Possible spot rate of £ in 90 days Probability

$1.30 25%

$1.36 25%

$1.40 30%

$1.45 20%

calculate the expected (or average) dollars paid in 90 days for the forward hedge you have chosen in part (a). Calculate the expected (or average) real costs of this hedging strategy relative to the no hedging scenario.

(c) Draw a net profit graph for this forward contract.

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