Question

NCR Co. purchases computer chips denominated in euros on a monthly basis from a Belgium supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three months before the next order will arrive. In other words, NCR Co is always covered for the next three monthly shipments. Because NCR Co consistently hedges in this manner, it is not concerned with exchange rate movements. Is NCR Co insulated from exchange rate movements? Explain briefly.

Answer 1

ANSWER:-

NCR Co. negotiates a 3 month forward contract three months before next order arrives. NCR Co. is consistently hedging in this manner but,

NCR Co. is not insulated from exchange rate movement. NCR Co. is exposed to exchange rate movements over time as the exchange rate changes over time. The forward rate of euro will rise over the time as the euro appreciates over time. This situation will lead to increase the payment which is to be made by NCR Co.

This is a case of continuous hedging.