Question
Your London-based firm expects to pay 50,000,000 in 6 months to a Japanese supplier. To hedge the exchange rate risk, your firm enters into a
Your London-based firm expects to pay 50,000,000 in 6 months to a Japanese supplier. To hedge the exchange rate risk, your firm enters into a forward agreement at a forward rate of 1.00 = $0.0083. Suppose you complete the following table to show the gain or loss realized on the forward given a potential future spot exchange rate 1.00 = $0.0081. What should be written for X, Y, and Z? Please note the proper way to communicate a gain versus a loss...For example, note that Y = ($5) would mean a $5 loss, and Y = $5 would mean a $5 gain. Spot exchange rate Value of converted currency Gain/(Loss) on forward Net realized value 1.00 = $0.0081 X Y Z a. X = $405,000 Y = ($10,000) Z = $415,000 b. X = $405,000 Y = $10,000 Z = $415,000 c. X = $415,000 Y = ($10,000) Z = $405,000 d. X = $415,000 Y = $10,000 Z = $405,000
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