A US company has bought a machine worth 3 million euros from a German manufactur
ID: 2817594 • Letter: A
Question
A US company has bought a machine worth 3 million euros from a German manufacturer with payment due in three months. The treasurer finds that DeutscheUSA (a fictitious name), a large commercial bank, bids euros for $1.5000 and offers euros for $1.5010 in three months’ time. He readily agrees and locks in that price. Suppose DeutscheUSA would like to hedge its trade. It finds that a German importer hoping to buy 2 million euros worth of computer parts from the United States in three months’ time. They also agree to trade.
(a) What is the price risk exposure remaining for DeutscheUSA?
$1 million US dollars today
$2 million US dollars in three months’ time
3 million euros today
1 million euros in three months’ time
None of these answers are correct.
(b) What is DeutscheUSA’s profit and risk exposure after three months time?
a profit of $1,000 US dollars plus risk exposure on $2 million dollars
a profit of $2,000 US dollars
a profit of $2,000 US dollars plus risk exposure on $1 million dollars
a profit of $2,000 US dollars plus risk exposure on 1 million euros
None of these answers are correct.
Explanation / Answer
a. Since , the US importer is expected to buy 3 million Euros from DeutscheUSA in three months time and the German importer is expected to sell 2 million Euros to DeutscheUSA in three months time, the net risk = 3 million - 2 million = 1 million Euros in three months time
Answer is 1 million euros in three months’ time
b. The risk is 1 million Euros. The net profit = 2,000,000*(1.5010 -1.5000) = $2,000
Answer is a profit of $2,000 US dollars plus risk exposure on 1 million euros
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