o ls cpt et ae o a importer in Germany. The invoice, just sent, is for 500,000 e
ID: 2794823 • Letter: O
Question
o ls cpt et ae o a importer in Germany. The invoice, just sent, is for 500,000 euros payable in 60 days, which will be about mid-February. The current exchange rate is $1.00 per euro, and you fear that the dollar will appreciate against the euro due to the rebound in the domestic economy and the improve- ment in the economy with potentially increasing interest rates. The 60-day forward rate is $.99. a. What is the value of the invoice in dollars at the current spot rate? b. If a forward contract is sold, what will be the value of the invoice in dollars at the forward rate? c. What are the advantages and disadvantages of hedging the transaction with a forward contract?Explanation / Answer
A.Value of Invoice at spot rate
Spot rate 1 Euro=$1
Amount of invoice=5,00,000 euros
Value of invoice in dollars=500000$
B.Forward contract is sold :
Amount to be received at the end of 60 days
Forward rate Euro=0.99$
=0.99*500000
$495000
C.If forward contract is entered at some rate,if forward rate is fall down then we receive Entered contract amount,this will cover the loss due to fall in contract rate
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.