An American firm sells farm equipment to a British company for ₤250,000 to be paid in 180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate risk by selling ₤250,000 forward 180 days at the prevailing 180-day forward exchange rate of $2.01/₤. What is the dollar amount the American firm is expected to receive in 180 days?

Question

Quizplus · Accepted Answer

The American firm will receive ₤250,000 in 180 days, and by selling the amount forward at the rate of $2.01/₤, it locks in the exchange rate. Therefore, the firm will receive 250,000 * 2.01 = $502,500.

An American Firm Sells Farm Equipment to a British Company