A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a f

Question

A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for         $78,275 Swiss francs, or $50,000, at the spot rate of 1.5655 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of           1.5750 francs. If the spot rate in 90 days is actually 1.6250 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

Explanation / Answer

Saving = (Spot rate (purchase) - Spot rate (actual))*Amount of money
S = (1.5655 - 1.6250 )*50,000 = $2975

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