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Chapter 12

Question 2

Forward contract

A French business enters into a contract to provide goods to a foreign customer
in Japan. The contract is invoiced for the value of 360,000 Japanese yen (JPY)
at a time when the exchange rate between Euros and yen is €1 = JPY120.

The finance manager of the French business is worried that the Euro will
strengthen against the Yen in the time before settlement of the invoice and so
enters into a forward contract at a rate of €1 = JPY125.

The actual exchange rate on the date of settlement is €1 = JPY130

By how much has the finance manager benefitted from entering into the forward
contract?

€ received using forward contract = 360,000/125 = €2,880

€ received without forward contract = 360,000/130 = €2,769

Extra cash received of €111

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