Question

Please no excel usage A Canadian company with operations in Germany expects to purchase 20 million euros worth of raw materials in three months. The company is considering using a three month forward contract on 20 million euros to mitigate exchange rate risk. The forward rate is C$1.25/euro. Assume that the spot rate at expiration is C$1.30/euro. What should the company do to hedge its exchange rate risk? A) Wait three months and buy 20 million euros in the foreign exchange market. B)Sell 20 million euros in the foreign exchange market today. C)Buy a three month forward contract on 20 million euros today. D)None of the above.ii) Find the company's profit/loss (in Canadian dollars) from their forward contract at expiration. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response. iii)In general, hedging with derivative contracts involves taking a position in the derivatives market that allows you to offset potential losses you might incur with the underlying asset.iV)An American company is set to receive 50 million Peruvian soles from its overseas operations in 12 months. The company decides to enter into a 12 month forward contract for 50 million soles to mitigate its price risk. The forward rate is $.30/sole. Find the American firm's profit/loss (in terms of dollars) on the forward contract if the spot rate is $.40/sole at expiration. Round intermediate steps to four decimals.5000000   Please assist . Many thanks in advance .

Answer 1

Answer for part i is option C. Buy a three month forward contract on 20 million euros today

Explanation

Spot rate after expiration period is C$ 1.30/Euro.

Amount to be paid in spot market after 3 months to buy 20 million euros = 1.30 * 20 million = 26 million canadian dollars.

Forward Contract Rate is C$ 1.25/Euro.

Amount to be paid in forward market today to buy 20 million euros = 1.25 * 20 million = 25 million canadian dollars.

Hence it is better to enter into a forward contract today.

ii) Company's profit on entering into a forward contract is 1 million canadian dollars (1.30-1.25)*20 = 1 million.

iv) Loss of 5 million dollars if the company enters into a forward contract.

Consideration received when entering in to a forward contract at $ 0.30/sole = 50 * 0.3 = 15 million dollars

Consideration received when in spot market after 12 months at $ 0.40/sole = 50 * 0.4 = 20 million dollars