You are the CFO of a manufacturing company in the United States. Your company expects to receive 10 million Euro from a European customer in six months. The current exchange rate between US dollar and Euro is 1.23 USD/EUR. However, you are afraid that the Euro currency may depreciate against the US dollars in the next six months. You may use the Euro currency forward contract to hedge the exchange rate risk. Assume the 6-month Euro currency forward exchange rate is 1.22USD/EUR. Should you buy or sell the Euro currency forward contract to hedge the exchange rate risk? Buy 10 million Euro forward contract today and then sell 10 million Euro forward contract six months later. Buy 10 million Euro in the six months forward contract. Sell 10 million Euro in the six months forward contract. We cannot use forward contract to The of a forward contract is obligated to delivery and pay for the contracted goods at the forward price; the of a forward contract is obligated to delivery and accept payment for the goods at the forward price. seller; make; buyer; take seller; take; buyer; make buyer; make; seller; take buyer; take; seller; make Question 8 /10 You enter into a forward contract to take delivery of one million Euro three months from now. What happens to the price you will pay at expiration if Euro depreciates during the contract? Your price was fixed, and you will receive correspondingly more Euros due to the depreciation. Your price will increase. Your price was fixed at the onset of the contract. Your price will decrease. The current spot exchange rate is $1.60/ and the three-month forward rate is $1.55/. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/ in three months. Assume that you would like to buy or sell 1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Sell 1,000,000 forward for $1.60/, and you expect to gain $20,000. Wait three months, if your forecast is correct buy 1,000,000 at $1.62/. Buy 1,000,000 forward for $1.55/, and you expect to gain $70,000. Buy 1,000,000 forward for $1.60/, and you expect to gain $20,000. Question 7 /10 If you have agreed to buy foreign exchange forward until the exchange rate moves, you haven't made money, so you're neither short nor long. you have a long position in the spot market. you have a long position in the forward contract. you have a short position in the forward contract. Your company sold a 10 million Euro forward contract. The contract expires in six months. The current exchange rate between US dollar and Euro is 1.23 USD/EUR in the spot marke and the 6-month Euro forward rate is 1.22USD/EUR. After six months, the exchange rate between Euro and US dollar turns out to be 1.18USD/EUR in the spot market. Calculate the gain or loss on your company's forward contract. $500,000 USD loss. $400,000 USD gain. $500,000 USD gain. $400,000 USD loss. The forward market involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will prevail at the maturity of the contract. involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today. involves contracting today for the right but not obligation to the future purchase or sale of foreign exchange at a price agreed upon today. none of the above Graylon, Inc., based in Washington, exports products to Germany and will receive payment of 200,000 in three months. Today, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10/. Graylon sold a forward contract of 200,000 based on the 3-month forward rate. If the euro spot rate three months later turns out to be $1.15, Graylon will receive $ for converting the euros. 220,000 200,000 230,000 224,000 Which of the following statement is correct? Forward contract buyer has the right but no obligation to buy foreign currency in the forward contract. Forward contract seller has the right but no obligation to sell foreign currency in the forward contract. Forward contract is a zero sum game between buyer and seller (e.g., when buyer makes money, seller loses money). Forward contract allows a buyer to receive the foreign currency today and make US dollar payment on a future date. The 60-day forward rate for the Canadian dollar is $1.07/C$, while the current spot rate of the Canadian dollar is $1.05/C$. What is the annualized forward premium or discount of the Canadian dollar? 1.9 percent premium. 11.4 percent premium. 11.4 percent discount. 1.9 percent discount