Page 496 - FM Integrated WorkBook STUDENT 2018-19

Chapter 21

Question 9

Forward exchange contract

On 1 Sep a US company enters into a contract with a customer for which
€100,000 is due to be received in 6 months. The exchange rate on the date the
contract is entered into is €0.93 = $1.

The company takes on a forward exchange contract with a rate of €0.94 = $1

Calculate the $ received if the exchange rate moves to:

(1) €0.97 = $1

(2) €0.89 = $1

It doesn’t matter which way the exchange rate moves as using the forward
exchange contract locks the rate at €0.94 = $1

$ received = €100,000/0.94 = $106,383

Question 10

Forward exchange contract

A UK importer expects to pay $150,000 in 3 months and enters into a forward
exchange contract with a spread of $1.22 – $1.24 = £1.

Calculate in £ how much will be paid to settle the contract.

$ to the £ – look to what the bank does with $

UK company will need to buy $ from the bank, meaning the bank is selling
them. The bank sells low so the appropriate rate is $1.22 = £1

$150,000/1.22 = £122,951

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