Acme Corp agrees to sell $10,000,000 at an exchange rate of .97E(euro)/$1 to Security Bank in 6 months. Six months later the exchange rate is $1.15/E. What was Acme’s profit on the forward contract? A. No profit; infact, Acme lost money B. $1,800,000 C. E1,800,000 D. $1,155,000 I hate this question
A. Acme lost money sell 10m return EUR9.7m exchange decreases to .8696E/ End of the term He needs to give him $1.15m to get EUR9.7m. OR Acme is going to get fewer EUR for $10m. Hope i am right.
it is d. because, acme was able to hedge the exchange rate risk. acme was able to lock in $1:03 for 1 euro, 6 months later $1.15=1euro, so acme bought euro for cheap. so the amount is 1.15-1.03=.12*10000000= 1200000 close to answer D.
The answer is D. Acme Corp agrees to sell $10,000,000 at an exchange rate of .97E(euro)/$1 to Security Bank in 6 months. Six months later the exchange rate is 1.15/E. What was Acme's profit on the forward contract? Each can be bought with .97 euros, so 10,000,000 * .97= 9,700,000 at the end of the contract each euro can now buy $1.15 so 9,700,000 * $1.15 = $11,155,000 $11,155,000 minus intial invesment of 10,000,000 = $1,155,000