A US firm has sold biomedical testing equipment to a swiss firm and will receive CHF210,000 in 30 days. The current exchange rate is CHF1.5448/, but rather than take the chance of adverse currency exchange rate risk, the US firm enters into a forward contract to sell Swiss francs at CHF1.5618/. If, in 30 days, the exchange rate is CHF1.5280/$ the US firm will receive: A: $2,974.31 more than if they had waited and not engaged in the forward contract. B: $1,479.69 more than if they had waited and not engaged in the forward contract. C: $1,479.69 less than if they had waited and not engaged in the forward contract. D: $2,974.31 less than if they had waited and not engaged in the forward contract. I need a refresher on this and I have book 6 of the curriculum at home.
He gets 210,000 CHF for the sale and he enters into a contract to sell them at Fx rate of CHF/USD 1.5618 210,000/1.5618 = 134460.238 USD’s confirmed as per the forward contract (forget abt all those default/counterparty risks’ here…) Had he not entered the contract, he would had received the USD’s with the Fx rate of 1.5280 CHF/USD 210,000/1.5280 = 137434.55 USD’s i.e USD have depreciated and CHF appreciated… so the difference is his loss… 134460.238 - 137434.55 = 2974.312 So probably I’ll go with answer ‘D’ Lemme know if this is correct? - Dinesh S
dinesh, I think you meant A, if he losed on the forward contract, that means he could’ve gotten more if he didn’t entered into the contract, no?
He received $2,974 less. as by entering into the forward contract, he lost "D: $2,974.31 less than if they had waited and not engaged in the forward contract. " If he had not entered into a contract he would get = 137,434.55 But now he will get = 134,460.24
oops, nm, I read it wrong…ya, it should be D
Using forward contract, US received is (210000)/(1.5618CHF/)=134460.238 $US Using Spot Rate (30days later), US received is (210000)/(1.5280CHF/)=137434.55 $US Difference is Spot market paid more than forward rate by 2974.00. US firm would be better off in the Spot market. As a receiving part of the CHF, US firm long on the CHF. As, US firm benefit from currency appreciation of CHF. For CHF, 1.5280CHF/(SPOT) is stronger than 1.5618CHF/$(forward) Answer is A.
"If, in 30 days, the exchange rate is CHF1.5280/$ the US firm will receive: " ---------- I interpreted this as the forward rate (30-days from now)? and not as the spot-rate (since we don’t have the money right away in our hands… they are gonna come to us (hopefully) in 30 days) but you never know… I might be completely wrong, let treker get back to us with the right answer? - Dinesh S
The “If, in 30 days…” means that the spot rate will be 1.528 in 30 days not that the forward rate is 1.528. The forward rate is known. The future spot rate is not. The “If” part says that the omniscient question writer is giving you the future spot rate.
So what’s the answer to this question??? I’m with D as well.
Yep it’s D. BTW - This “than if they had waited and not engaged in the forward contract” is pretty awkward. The phrase should just be “not entered a forward contract”. Change “forward” to “futures” and this is the archetypal Series 3 question.