Question

You are a US company which produces women's shoes for export.  All of your production is in the US in US dollars, but some of your revenues are in Europe and denominated in EUR.  The Europe revenue is actually EUR and has been converted to US dollars at the EUR forward rate of $1.20 in order to be included in your US dollar forecast.

Forecast Inflows
Europe Revenues = $3,000
US Revenues = $9,000

Forecast Outflows
US Costs = $8,000

If the actual EUR exchange rate ends up being 1.45, then will you have a gain or a loss on your exposure? Is gain or loss?

Answer 1

Answer:

If the actual EUR exchange rate ends up being 1.45, then you will have a gain on your exposure.

The Europe revenue is actually EUR and has been converted to US dollars at the EUR forward rate of $1.20 in order to be included in your US dollar forecast.

Converted Forecast Europe revenue in USD = $3,000

Forecast Europe revenue in Euro = 3000 / 1.20 = €2,500

If the actual EUR exchange rate ends up being 1.45, same Europe revenue of €2,500, in USD will be = $3,625.

Assuming sales in euro remains same gain in USD = 3625 - 3000 = $625

When we export and invoicing is in currency of country where we are exporting, if such foreign currency appreciates there will be a gain.