In: Finance
Ninety days ago, a British firm bought merchandise from a Dutch company for €100,000. The exchange rate at the time of the sale was £0.855/€. The firm chose not to hedge to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to £0.845/€, then what profit or loss will the British firm realize?
Ninety days ago, a British firm sold merchandise to a Spanish company for €500,000. The exchange rate at the time of the sale was £0.870/€. Forty-five days ago, the firm chose to hedge to reduce or eliminate the risk of changes in the exchange rate by entering a forward contract that locked in an exchange rate of £0.891/€. If the exchange rate today is £0.897/€, then how much will the British firm be paid in pounds?
Exchange rate at the time of sale= £0.855/€
Amount payable at this exchange rate=£(100000*0.855)=£85,500
Exchange rate at the time of payment= £0.845/€
Amount paid =£(100000*0.845)=£84,500
Profit Realized=85500-84500=£1,000
How much will the British firm be paid in pounds?
Amount payable = €500,000
Forward exchange rate=£0.891/€
Amount that will be paid in Pounds=500000*0.891==£445,500