Cray Research (a U.S firm) purchased a super computer from the Max Planck Institute in Germany on credit and invoiced €10 ,000,000 payable in six months. Currently, the six-month forward exchange rate is $1.295/€ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.252/€ in six months.
(a) What is the expected gain/loss from the forward hedging? (measured in $, and round your answer to zero decimal, e.g., $56,699).
Cray Research being a US firm purchased a computer from Max Planck Institute of Germany. It has €10 ,000,000 payable in six months.
We need to calculate the dollar outflow and gain or loss from forward hedging.
Spot rate in six months - $1.252/€
This means 1€ is equivalent to $1.252
Forward exchange rate of six months - $1.295/€
This means 1€ is equivalent to $1.295
Dollar outflow if the exposure is kept unhedged and rely on spot rate in six months
= 10 ,000,000 * 1.252
= $12,520,000
Dollar outflow if the exposure is kept hedged by entering into a six month forward contract
= 10 ,000,000 * 1.295
= $12,950,000
Therefore expected loss from forward hedging since the dollar outflow is more if forward contract is used
= $12,950,000 - $12,520,000
= $430,000
Cray Research (a U.S firm) purchased a super computer from the Max Planck Institute in Germany...
Cray Research (a U.S firm) purchased a super computer from the Max Planck Institute in Germany on credit and invoiced €10 ,000,000 payable in six months. Currently, the six-month forward exchange rate is $1.295/€ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.252/€ in six months. (a) What is the expected gain/loss from the forward hedging? (measured in $, and round your answer to zero decimal, e.g., $56,699).
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