Suppose a U.S. company contracted to sell 100,000 units of a product to a French

Question

Suppose a U.S. company contracted to sell 100,000 units of a product to a French company at a unit sales price of €40 with delivery in 120 days and payment due on delivery. The nominal exchange rate between U.S. dollar and Euro is 1.18 $/€ on the contract signing date. The U.S. company has the option of using a 120-day forward contract to protect itself against an adverse change in the exchange rate. Based on the assessment of the financial markets, the 120-day forward contract can be purchased at a discount of 3%.

If the nominal exchange rate between U.S. dollar and Euro decreases to 1.10 $/€ on the delivery date, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide at least one step of calculation for full credit. (4 points)

If the U.S. company chooses to use the 120-day forward contact to protect against the foreign exchange risk, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide the forward rate and at least one step of calculation for full credit. (8 points)

Explanation / Answer

us company contracted to sell 100000 units of a products to frenh comapany

sales price = 40 in 120 days

exchange rate between us and euro is 1.18 $ / euro

then the price which they get 100000*40=4000000 euros

and as per us dollor they will be paying 4720000

now if the nominal exchange rate between U.S dollor and Euro has been decresed to 1.10

then the U.S company will receive 100000*1.10=4400000

they will receive 320000 lesser `

if the U.S company chooses to use 120 days to forward the foreign exchange risk then they will get 1000000*1.18=118000

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