Page 193 - AFM Integrated Workbook STUDENT S18-J19

Hedging foreign exchange risk

Illustration 3

Williams Co is a UK based company that has agreed to buy some goods from
France for €200,000 payable in three months’ time.

The spot rate of exchange is €1.1518 - €1.1856 to £1, and the bank is quoting
a three month forward rate of €1.1793 - €1.2120 to £1.

The company needs to sell £ to buy € in order to pay for the goods, therefore
the lower of the two quoted rates is relevant.

If Williams Co enters the forward contract it will fix to a rate of €1.1793 to £1
i.e. the fixed cost of the €200,000 will be £169,592 (200,000 / 1.1793),
irrespective of how the spot rate moves over the next three months.

Illustrations and further practice

Now try TYU 1 in Chapter 10

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