Hedging: Palermo Company sold equipment to a French company. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar.

Question

Quizplus · Accepted Answer

To determine the dollar revenue Palermo would lose by not hedging, we need to calculate the difference in the amount of dollars it would receive if it sold the euros forward versus if it waited 90 days to sell them at the expected spot rate.

If Palermo sells the euros forward at the 90-day rate of $1.5922/€, it would receive:

€4,275,000 x $1.5922/€ = $6,811,535

If Palermo waits 90 days to sell the euros at the expected spot rate of $1.5645/€, it would receive:

€4,275,000 x $1.5645/€ = $6,679,238

The difference between these two amounts is:

$6,811,535 - $6,679,238 = $132,297

Therefore, Palermo would lose $132,297 by not selling forward the euros. The closest answer choice to this amount is B) $118,418, which is the best choice.

Hedging: Palermo Company Sold Equipment to a French Company