Given the following information:
$\bullet$he future spot rate C$0.00965 per yen
$\bullet$the current spot rate C$0.0088 per yen
$\bullet$the forward rate C$0.009721 per yen.
What is the cost (or proceeds)in Canadian dollars to eliminate foreign exchange exposure for 100,000 yen to be paid to a foreign supplier.
A)Cost C$965.00
B)Cost C$880.00
C)Cost C$972.10
D)Proceeds C$880.00

Question

Quizplus · Accepted Answer

To eliminate foreign exchange exposure, a company can enter into a forward contract. This locks in the exchange rate for a future date, ensuring that the company knows exactly how much it will have to pay or receive in a foreign currency. In this case, the company needs to pay 100,000 yen to a foreign supplier. The current spot rate is C$0.0088 per yen, so the cost in Canadian dollars would be 100,000 yen x C$0.0088 per yen = C$880. However, if the company does not enter into a forward contract and the future spot rate moves against them, they could end up paying more than C$880. The forward rate for the same date is C$0.009721 per yen, so if the company enters into a forward contract at this rate, the cost in Canadian dollars would be 100,000 yen x C$0.009721 per yen = C$972.10. Therefore, the best choice is C.

Given the Following Information ∙\bullet∙ He Future Spot Rate C$0 ∙\bullet∙ The Current Spot Rate C$0

Given the Following Information $\bullet$ He Future Spot Rate C$0 $\bullet$ The Current Spot Rate C$0