A US-based exporter anticipated receiving €100 million in six months,and took a short forward position,locking-in an exchange rate of $1.38/€.If after six months,at maturity,the exporter calculates that she has made a profit of $2 million from the hedging strategy,the spot exchange rate at maturity must be
A)$ 0.50/€.
B)$ 1.36/€
C)$1.40/€
D)$ 2.00/€

Question

Quizplus · Accepted Answer

To calculate the expected spot exchange rate at maturity, we need to first calculate the forward exchange rate the exporter locked-in:

Forward exchange rate = $1.38/€

Profit from hedging strategy = $2 million

Amount received in euros = €100 million

Profit in euros = $2 million * (1/1.38€/$) = €1.449 million

Total amount received in euros = €100 million + €1.449 million = €101.449 million

Expected spot exchange rate = $/€ = ($101.449 million/€100 million) = $1.01449/€

Therefore, the expected spot exchange rate at maturity must be $1.01449/€ or approximately $1.36/€. The correct answer is B.

A US-Based Exporter Anticipated Receiving €100 Million in Six Months,and