Question

1012.1) A Dutch firm sells merchandise today to a British company for £500,000. The current exchange rate is €1.450/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to €1.375/£ the Dutch firm will realize a (gain or loss) of €________. 1012.1) _______ , _______

Answer 1

There will be gain uf Euro 37500 .

A/c Payable	£ 5,00,000.00
Current Exchange Rate (Euro / GBP)	€            1.4500
A/c Paybale [ Current Value in Euro]	€ 7,25,000.00	[ 500000 GBP x 1.45 Euro / GBP]
After 3 months
Exchange Rate (Euro / GBP)	€            1.3750
A/c Paybale [Future Value in Euro]	€ 6,87,500.00	[ 500000 GBP x 1.375 Euro / GBP]
Now, after 3 months company will pa lesser euro than current situation.
Hence, Gain	€      37,500.00
[ 725000 - 687500 = 37500 ]