Question

An importer from the United States that owes a Belgian company 500,000 euros payable in 30 days anticipates that the United States dollar will depreciate in that period. What would you recommend the importer do? Buy euros now or wait for the debt due date? What would happen to the utility of the importer if, having followed his advice, the dollar appreciated instead of depreciating as the importer had predicted?

Answer 1

Answer :-

We should comprehend the given data :-

The US importer needs to pay a Belgian company 500,000 euros in 30 days, and if the USD depreciates, he should pay more in USD terms to purchase a similar measure of Euros and meet the prerequisite.

Recommendation :-

In the event that the importer firmly feels that the USD will deteriorate, at that point he can go into a subsidiary contract. It could be a forward contract of selling USD for a fixed rate of Euro yet then the importer will be committed to satisfy the contract.

In any case, in the event that the USD doesn't devalue or in actuality appreciates, at that point supporting through the forward contract probably won't be helpful. If there should be an occurrence of a forward contract, there wont be any forthright installment at the hour of entering the contract so that is an or more point. He can even utilize choices, for example, a put on USD or a Call on Euro. That way, if his expectations is valid, he will practice the alternative yet he has the choice of not practicing if the expectations dont work out as expected.

For this privilege however not a commitment choice contract, the importer should pay a premium which will be non refundable regardless of whether the importer doesn't practice the choice. So every one of the subordinate option has its give or take.

• In the event that the importer doesn't feel too unequivocally about his expectation, at that point he should never really allow an opportunity to tell. This is leaving his position unhedged and on occasion that is certainly not an impractical notion.

• In the event that the importer is totally secure with his expectations, at that point he should purchase Euros now and stand by however even so no one but time can determine what might be the actual exchange rate.

Effect on Utility :-

• On the off chance that the USD appreciates, and the importer had gone into a forward contract, at that point he will lose out in light of the fact that he could have purchased the Euros less expensive in the market at the hour of settlement however he should satisfy the forward contract at a higher rate.

• On the off chance that the USD appreciates, and the importer had gone into a choice contract, at that point he won't practice the alternative and lose out just the premium he had paid at the hour of purchasing the choice. This will reduce his net increase from the exchange of currency.

• On the off chance that the USD appreciates, and the importer had left the position unhedged, at that point he will pick up from the thankfulness while on the off chance that he had just purchased the Euro, He will lose out on the exchange rate distinction since he could have purchased the Euro now at a lower exchange rate.

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