# Currency forward contracts

the bsas exam contains a currency forward contract question. the LOS (71h) requires that we can DESCRIBE the characteristics of these only. do you think we would be required to know how to calculate these also, given the LOS doesnt require a calc? probly not relevant but the question is below: Siemens Company expects to receive 100,000,000 in 90 days. A dealer provides a quote of€0.6897/ for a currency forward contract to expire in 90 days. Suppose that at the end of 90 days, the rate is €0.6826/. Assume that settlement is in cash. Which of the following statements is closest to the net cash receipt at expiration if Siemens enters into a forward contract expiring in 90 days to buy euro at €0.6897/? A. €68,050,000. B. €68,260,000. C. €68,615,000. D. €68,970,000.

D. i think it’s safe to know. I noticed two questions on mock (from econ) which weren’t on LOS but were in CFA text.

I’m confused (nothing new) I assumed net cash receipt would be (0.6826 - 06897)*\$10M = -EUR71,000 From Siemens to Dealer?

Chad - These are sort of counter-intuitive… Siemens is locked into buying the Euro for .6897/\$ That means, they get .6897 Euros for every dollar (pretty self explanatory, but it helps to think the problem through). If they had to go to the open market, they would be getting .6826 Euros for every dollar. So, effectively, they would end up with less Euros than with the contract in place. SO, the net cash receipt by Seimens is going to be the 68,970,000 number, with 710,000 coming out of the dealer’s pocket.

I think you sould be able to do this problem. There is (essentially) no calculation to be doen here so I think it’s within the LOS.

Thanks hoff, I get it.