10. excel Using a Spreadsheet to Calculate Foreign Exchange Risk: Suppose that on January 18, 2012, a U.S. firm plans to purchase 3 million euros’ (€)

worth of French bonds from a French FI in one month’s time. The French FI wants payment in euros. Thus, the U.S.

firm must convert dollars into euros. The spot exchange rate for January 18, 2012, of U.S. dollars for euros is 1.6545, or one euro costs $1.6545 in dollars. Consequently, the U.S.

firm must convert:

U.S / exchange rate 3 million m

.$

. .

€ €

€

⫻ ⫽

⫻ ⫽

1 6545 3 $4,963,500 into euros today. One month after the conversion of dollars to euros, the French bond purchase deal falls through and the U.S. firm no longer needs the euros it purchased at $1.6545 per euro. Calculate the gain/loss on the bond to the U.S. firm if the spot exchange rate of U.S. dollars for euros is 1.7555, 1.6545, 1.6135, and 1.5845 at the end of the month. ( LG 9-5 )

U.S. $ to Price at Exchange Price at Beginning Rate at End End of of Month of Month of Month => The Gain/Loss Will Be

$4,963,500 1.7555 1.7555 ⫻ € 3 million ⫽ $5,266,500 $5,266,500 ⫺ $4,963,500 ⫽ $330,300 4,963,500 1.6545 1.6545 ⫻ € 3 million ⫽ $4,963,500 $4,963,500 ⫺ $4,963,500 ⫽ $0 4,963,500 1.6135 1.6135 ⫻ € 3 million ⫽ $4,840,500 $4,840,500 ⫺ $4,963,500 ⫽⫺$123,00 4,963,500 1.5845 1.5845 ⫻ € 3 million ⫽ $4,753,500 $4,753,500 ⫺ $4,963,500 ⫽⫺$210,000