3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassw

Question

3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
a. -$396
b. -$243
c. $0
d. $243
e. $638

Explanation / Answer

Time line

0 30 60 90 Days
| |
Spot rate 1.665 SFr/US$ 39,960 SFr
Forward rate 1.682 SFr/US$ 1.638 spot rate
90-day forward contract: $23,757.43

Calculate the cost of the forward contract at the forward rate:
39,960 SFr/(1.682 SFr/US$) = $23,757.43.

Calculate the cost of purchasing exchange currency at the spot rate in 90 days to satisfy the payable:
39,960 SFr/1.638 SFr/US$ = $24,395.60.

Calculate the savings from the forward market hedge:
$24,395.60 – $23,757.43 = $638.17 $638 (E)

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