A Hong Kong company needs to pay one of its suppliers 8,000,000 Indian rupees 90 days from now. The company is worried that rupees will appreciate during this time and decides to partially hedge its exchange rate risk by entering a contract to purchase half of the rupees 90 days into the future for a price of 5.9364 INR/HKD. The current exchange rate is 5.7921 INR/HKD. 90 days later, the exchange rate is 5.8764 INR/HKD. What is the gain/loss of entering this forward contract? A) 9,906 HKD. B) -6,880 HKD. C) 6,880 HKD. D) -9,906 HKD. Your answer: B was incorrect. The correct answer was C) 6,880 HKD. By entering into the forward contract, the company gained (4,000,000/5.9364 – 4,000,000/5.8764) = 6,880 HKD. Shouldn’t the Anwser be “B” I only ask cause this forX stuff I’m always flipping it around.
By getting into a forward contract they will receive Rs5.9364 for every HKD, if they hadn’t, they would have only received Rs 5.7921 for the HKD. so by getting into the contract, they gained
He guessed correctly and locked himself in at a lower price than he would have without the contract. Therefore he should get the money. (that’s my reasoning at least)
i think the answer is right you can buy 5.9364 rupies with one hkd instead of 5.8764 that means that you gain the difference which is ans C
(0.17017221 - 0.1684522)*4m = 6880.057 (GAIN) = C - Dinesh S
(4,000,000/5.9364 – 4,000,000/5.8764) = 6,880 HKD equals -6880 not 6880 maybe it was just a mistake in the explanation… thanks.
^ so you still think HK company made a loss? - Dinesh S
(4,000,000/5.9364 – 4,000,000/5.8764) = -6,880 HKD ==> (HKD paid for 4m INR under future contract - current mkt. value of 4m INR) = -6,880 HKD. ==> HKD company paid 6880 less than market value & hence they gained.
I always find it better to think from the point of view of the company entering the contract (and then converting the indirect quotes to direct or vice versa) So, it’s neater to me like this… (0.17017221 - 0.1684522)*4m = 6880.057 (GAIN) = C The unnecessary -ve sign, gives the impression that the HK company lost… - Dinesh S