Question

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €100,000 payable in one year. Assume that Boeing sells a currency forward contract of €100,000 million for delivery in one year, in exchange for a predetermined amount of U.S. dollars at $1.60/€. Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.40/€. What is the gain/loss for Boeing through forward hedging? If it is a gain, please enter a positive number. If it is a loss, please enter a negative number.

Answer 1

Bills Payable in Euro 100,000

Forward Rate 1 Euro = $ 1.60

Rate at maturity 1 Euro = $ 1.40

Amount payable in Euro as per Forward Contract = 100,000 * 1.60 = $ 160,000

Amount payable in Euro as per Maturity Spot   = 100,000 * 1.40 = $ 140,000

Boeing Corporation paid more $ by 160,000 - 140,000 = 20,000 LOSS

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