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 12,000 Jetta were sold in US, in 2003, by 60% forward hedge and 40% not hedged. What would be profits or loss from sales of 12,000 Jetta in US?  

Answer 1

First we calculate selling price per Jetta in Euro in 2003.

Total selling price in dollars = quantity sold*selling price per quantity = 12,000*$15,000 = $180,000,000

now we convert $180,000,000 in to Euro using forward rate for hedged amount and market exchange rate for not hedged amount.

Sale with 60% forward hedge = ($180,000,000*60%)*1 $/Euro = $108,000,000*1 $/Euro = Euro 108,000,000

Sale with 40% not hedged = ($180,000,000*40%)/1.25$/Euro = $72,000,000/1.25$/Euro = Euro 57,600,000

Forward rate is $1 equal to 1 Euro. so we multiplied it with 60% sale value. Market exchange rate is $1.25 equal to 1 Euro.so, Euro is expansive than dollars and 40% Euro sale value will be lower than dollar value. hence we divided 40% sale value with market exchange rate.

Total sale value in Euros = Euro 108,000,000 + Euro 57,600,000 = Euro 165,600,000

Profit or loss in Euro from sale in US in 2003 = Total sale value in Euros - (quantity sold*production cost in Euro)

Profit or loss in Euro from sale in US in 2003 = Euro 165,600,000 - (12,000*Euro 14,000) = Euro 165,600,000 - Euro 168,000,000 = Euro -2,400,000

loss from sales of 12,000 Jetta in US is Euro -2,400,000.