Question

Shown below are exchange rates for several currencies.  

	US$ per 1 euro	US$ per 1 franc	Mexican peso per US$1
Spot rate	1.21	1.03	19.68
30-day forward rate	1.19	1.06	20.15
60-day forward rate	1.15	1.07	21.28

A U.S. company purchases goods from several foreign companies with payment due in euros, francs, and pesos.  Would the company be better off paying any of the suppliers now or should it wait 60 days? Why?

Answer 1

1)	Purchases in euros:
	It is better to pay 60 days later as only lesser number of dollars
	would be needed to buy the euros then.
	If the amount payable is 1000 euros:
	Paying now will require 1000*1.21 =	$           1,210.00
	Paying on the 30th day will require 1000*1.19 =	$           1,190.00
	Paying on the 60th day will require 1000*1.15 =	$           1,150.00
	Hence, the $ outlfow will be lowest when paid on the 60th day.
2)	Purchases in franc:
	It is advisable to pay today as that will cause the $ outflow to
	be the lowest.
	If the amount payable is 1000 francs:
	Paying now will require 1000*1.03 =	$           1,030.00
	Paying on the 30th day will require 1000*1.06 =	$           1,060.00
	Paying on the 60th day will require 1000*1.07 =	$           1,070.00
	Hence, the $ outlfow will be lowest when paid today.
3)	Purchases in pesos:
	It is advisable to pay 60 days later as that will cause the $ outflow to
	be the lowest.
	If the amount payable is 1000 pesos:
	Paying now will require 1000/19.68 =	$                 50.81
	Paying on the 30th day will require 1000/20.15 =	$                 49.63
	Paying on the 60th day will require 1000/21.28 =	$                 46.99
	Hence, the $ outlfow will be lowest when paid on the 60th day.