4. You are a U.S. exporter concerned about your transaction exposure on a recent

Question

4. You are a U.S. exporter concerned about your transaction exposure on a recent sale to an importer in Germany. The invoice, just sent, is for 500,000 euros payable in 60 days, which will be about mid-February. The current exchange rate is $1.00 per euro, and you fear that the dollar will appreciate against the euro due to the rebound in the domestic economy and the improve- ment in the economy with potentially increasing interest rates. The 60-day forward rate is $.99 a. What is the value of the invoice in dollars at the current spot rate? b. If a forward contract is sold, what will be the value of the invoice in dollars at the forward rate? contract?

Explanation / Answer

Question 4. a). Solution :- Invoice value in (dollar terms) at current spot rate = 500000 * 1.00

= 500000 Dollars.

Conclusion :- Invoice value at current spot rate = 500000 Dollars.

Question 4. b). Solution :- Invoice value in (dollar terms) at forward rate = 500000 * 0.99

= 495000 Dollars.

Conclusion :- Invoice value at forward rate = 495000 Dollars.

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