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Today US based MNC is selling its product to one company in Germany with the payment...

Today US based MNC is selling its product to one company in Germany with the payment of euro 2 million in 90 days. Today’s sport rate is $1.30/euro. • What is a risk factor of US based MNC? • If 90 day forward rate in euro is $1.34/euro, how the US MNC avoids the FX rate risk? • Does the US MNC have a forward gain or loss?

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Answer #1

The US Company will receive payment in Euro and has to convert it into Dollars, hence the risk for US based MNC is that the value of euro. If Euro depreciates, it will be a loss for US based company

The company can avoid the risk by selling euro forward at the given rate of $1.34/Euro. The company has fixed its receivables in Dollar by doing this

The MNC has a forward gain of (1.34-1.30)*2,000,000 = $80,000

Since the forward rate is higher than the spot rate

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