Question

A US-based exporter anticipated receiving 100 million EURO in six months, and took a long forward position, locking-in an exchange rate of $1.3/EURO. If six months later at maturity, the exporter calculates that she has made a profit of $14 million from the currency forward contract, the spot exchange rate at maturity must be __________ USD/EURO

Round your final answers to TWO decimal points.

Answer 1

Notes: exchange rate at maturity must be 1.16 USD/EURO is in question format but in standard format USD/EURO means USD 1 = ?? EURO in standard format in would (1/1.16) = EURO 0.86 per USD

Solution:
	The spot exchange rate at maturity must be 1.16 USD/EURO
Working Notes:
	she has made a profit of $14 million from the currency forward contract
	Means at maturity exchange rate must be lower than what she have been received under forward contract
	Let at maturity exchange rate is $Y /Euro
	Profit = Contract amount x ( Forward rate - Maturity exchange rate)
	Profit =$14 million =$14,000,000
	Contract amount =100,000,000 euro
	Forward rate = $1.3 per Euro
	Maturity exchange rate = $ ?? Per EURO
	14,000,000 = 100,000,000 x ( 1.3 - Maturity exchange rate)
	Maturity exchange rate =1.3 - (14,000,000/100,000,000)
	Maturity exchange rate =1.3 - 0.14
	Maturity exchange rate =1.16
	This Maturity exchange rate =$1.16 per EURO
	This Maturity exchange rate =1.16 USD/EURO
Please feel free to ask if anything about above solution in comment section of the question.