Question

You will have a tuition payment this time next year, payable in US dollars. Will you take any action, to cover changes in exchange rates? If so, what would you do, and why? For US students, assume you will spend a semester abroad, in the Euro zone, and will need to pay tuition in the local currency, so you have the same challenge.

Answer 1

For a non US student the fee payable in us dollars poses the risk of dollar rising. Because in that case he/she will have to pay more home currency in order to buy same amount of dollars to pay the fees. Hence he/she should enter into forward contract to buy certain amount of dollars. By doing this the risk of dollar rising will be eliminated and fixed amount of home currency will be required. But if the dollar value decline he/she will not be able to gain by such decline.

For a US student , the fee payable in EURO will pose the risk of EURO rising and student will have to pay more dollars to buy same amount of euro to pay the fees. Here also euro forward should be bought and dollars already fixed amount of dollars will be required.