Sherwin-Williams must pay a Euro-denominated payable of €100,000 in 120 days. Th

Question

Sherwin-Williams must pay a Euro-denominated payable of €100,000 in 120 days. The current spot rate of the euro is $1.3000 and the 120 forward rate quoted today is $1.3300. Sherwin is worried that the euro will appreciate over the next 120 days, increasing the dollar cost of their euro receivable. To hedge this risk, they enter into a forward contract with their bank to “buy euros forward” at the forward rate of $1.3300. Assume that 120 days later, Sherwin executes the contract to buy €100,000 at the contracted forward rate of $1.3300. Assume also that the spot rate at that time is $1.3200.

(a) How many dollars did Sherwin have to pay for the €100,000 by executing the forward contract?

(b) How many dollars would Sherwin have had to pay for the euros if they had not hedged with a forward contract but instead purchased euros in the spot market when the payable was due?

(c) Now assume that the spot rate at the time the payable is due is $1.3355. How much did Sherwin save by purchasing their euros through a forward contract rather than on the spot market?

Explanation / Answer

1) 100000*1.3300 i.e 133000

2) 100000*1.3200 i.e 132000

3) 100000*1.3355 i.e 133500

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