Question

A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.6480 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

ans;

forward contract not entered when dollar recivable

          = import value/90 day future spot rate

          = 39960/1.6480

          = 24247.57

forward contract entered when dollar recivable

          = 39960/1.682

          = 23757.43

hence, loss on forward contract is = 24247.57 - 23757.43

                                                      = 490.14

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