Question

A German corporation finalized a sale to a Thai client on April 15. The German corporation will deliver some gardening equipment on May 31 and will be paid 345 million baht on June 30. The current spot exchange rate is 40 baht/euro. The German corporation is worried about a depreciation of the baht in the coming two months and wishes to sell those baht forward against euros.

a. Give some reasons why the German corporation should use forward rather than futures currency contracts.

b. Exactly what contract should the German corporation arrange with its bank?

Answer 1

a . The advantages are clear, the most obvious being you can stop things costing you more, or make sure you don’t lose out on foreign currency due at some point in the future.

1 Buy now, pay later
2 Lock in the current exchange rate for a future purchase/receipt
3 Hedge your exposure and reduce your risk
4 Very simple to set up
5 Inexpensive to maintain
6 You can draw down to get currency early
7 You can rollover if you don’t need funds until after the original settlement.

These are the reasons why german corporation should use forward contract.

b .the german corporation should enter into a forward contract with thai corporation for june 30 for 435 million bath @40 bath/euro .