You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

Question

Quizplus · Accepted Answer

If you don't buy the forward contract and the spot rate in one year is Sf1.65/$, you will pay less in dollars compared to the forward rate of Sf1.7/$. The difference is 0.05 Sf/$, which results in a saving of $8,912 when buying 500,000 Swiss Francs.

You Have Decided to Hedge Your Exchange-Rate Risk in Your