buy euro; loss of 450,000 sell euro; loss of 450,000 sell euro; gain of 450,000

Question

       buy euro; loss of 450,000
       sell euro; loss of 450,000
       sell euro; gain of 450,000
       buy euro; gain of 450,000

On September 1st, A&F Co. purchased raw material from German and would pay 150 million euros for this order on December 1st. It negotiated a 3-month forward contract to buy 150 million euros on that date at $1.32. On October 1st, the German firm informed A&F Co. that it wouldn't be able to fulfill that order. The euro spot rate on October 1st is $1.35 and 2-month forward rate exhibits 2% discount. To offset its existing contract, A&F Co. will negotiate a forward contract to ____ for the date of December 1st and the profit/loss generated from this transaction is a ____ U.S. dollars. (Points : 3.5)

Explanation / Answer

sell euro; gain of 450,000

Explantation:

Saving on forward contract to buy (1.35-1.32)X 150,000,000 = 4,500,000

Expense on forward contract to sell (1.35X2%) X 150,000,000 = 4,050,000

Gain generated from this transaction 450,000

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