Stover Corporation, a Canadian importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $38,610, at the spot rate of 1.035 francs per dollar. The terms of the purchase are net 90 days, and the Canadian firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.099 francs. If the spot rate in 90 days is actually 1.062 francs, how much will the Canadian firm have saved or lost in Canadian dollars by hedging its exchange rate exposure?

Question

Quizplus · Accepted Answer

The Canadian firm will save $1,267 by hedging its exchange rate exposure.The forward contract locks in the exchange rate at 1.099 francs per dollar, which is higher than the spot rate of 1.062 francs per dollar that prevails in 90 days. This means that the Canadian firm will receive more Canadian dollars for its Swiss francs when it sells them in 90 days.The amount of the savings is calculated as follows:Savings = (Forward rate - Spot rate) * Amount of Swiss francsSavings = (1.099 - 1.062) * 39,960Savings = $1,267

Stover Corporation, a Canadian Importer, Makes a Purchase of Crystal