Question

Jetta production cost in 2002 and 2003 was 14,000 Euro per Jetta. Jetta sold in US at $15,000 in 2002 and 2003. Forward hedge exchange rate was 1 $/Euro in 2003. Rate without hedge (i.e. market exchange rate) was 1.25$/Euro in 2003. If 10,000 Jetta were sold in US, in 2003, by 70% forward hedge and 30% not hedged. What would be profits or loss from sales of 10,000 Jetta in US? (the answer is 1.0 million Euro, please show work on how to get this answer )

Answer 1

	Hedged	Not Hedged	Total
Price payable in EURO	14,000	14,000
Quantity	7,000	3,000
Amount payable in EURO	=7000*14000	=3000*14000
Amount payable in EURO	98,000,000	42,000,000	140,000,000
Sale price	15,000	15,000
Sale price for 7000& 3000	105,000,000	45,000,000	150,000,000
Forex rate	1	1.25
Sale price converted to Euro	105,000,000	36,000,000	141,000,000
Gain (Sale price in EURO less amount payable in EURO)	7,000,000	(6,000,000)	1,000,000