Question

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?

Answer 1

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