I am hoping someone one can independently verify this question. I am not able to get the answer that is provided.
Edgar Raclot, CFA, is a manager at Exlom Inc. Most of the revenue of the firm
comes from its export business. So, the firm has to manage its foreign exchange
risk judiciously. To hedge the currency risk and to make a profit from the foreign
exchange transactions is the primary job of Edgar.
The company is based in the USA. It is expecting to receive a payment worth EUR
500,0000 from European countries after six months. The company does not want to
take the exchange rate risk. The current exchange rate between EUR and USD is
1.3512 USD/EUR. The 6-month rates in the USA and Europe are 3.5% and 2.5%.
Edgar decides to enter into the contract.
The spot exchange rate becomes 1.3550 after two months of initiation of the
contract. Edgar decides to square off the contract position at that time.
What is the total profit/loss made by Edgar in the forward currency contract?
a) Profit of $1,387.61
b) Profit of $288.78
c) Loss of $799.30