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Foreign currency transactions and hedging foreign exchange risk Hi, I have an example problem: Forward currency contract hedge of a foreign currency - denominated asset

Foreign currency transactions and hedging foreign exchange risk

Hi, I have an example problem:

Forward currency contract hedge of a foreign currency - denominated asset

dec 1,2020 eximco sells merchandise to UK customer for british pounds. 3 month forward rate is $1.288, and eximco signs contract to pay new world bank 1 million british pounds in 3 months for exchange of $1,288,000.

1/1/20 Spot rate = $1.300 Forward rate = $1.288 (to be paid 3/1/21)

Questions:

1. What does it mean to engage in a forward contract vs a call option contract

2. What is the spot rate mean vs. the forward rate? Is the spot rate the amount the US $ is exchanging for british pounds today and the forward would be in the future?

3. The difference between the spot and forward rate represents what for Eximco?

3. The 1 million would be the price of the merchandise sold and the $1,288,000 would be the amount we receive at the end of the contracts so the risk is that the pounds would depreciate? because we would possibly get less money than the $1,288,000 if it did depreciate?

Please explain in detail as I am having so much trouble with this topic :( Thank you!

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