An Australian company has payables of USD100,000, due in three months. The current spot AUD/ USD exchange rate is 1.7900/1.8000. The current three-month forward AUD/USD exchange rate is 1.7400/1.7500. The expected AUD/USD exchange rate is 1.7500/1.7600 in three months time. Calculate the profit or loss you would expect to make on a forward hedge.
A) AUD1,000 loss
B) AUD1,000 profit
C) AUD2,000 profit
D) AUD2,000 loss

Question

Quizplus · Accepted Answer

The company can lock in the forward rate of 1.7500 to pay USD100,000, which would cost AUD175,000. If the expected spot rate in three months is 1.7500, the cost would also be AUD175,000, resulting in no profit or loss. However, since the forward rate is better than the expected rate of 1.7600, the company saves AUD1,000 (USD100,000 / 1.7500 - USD100,000 / 1.7600).

An Australian Company Has Payables of USD100,000, Due in Three