You are a financial manager with ICN,Co.and you have used a forward contract to hedge a yen 100,000,000 payment the company expects in 90 days.Your contract calls for you to deliver yen at 111.25 yen per U.S.dollar.Suppose the spot rate at that time is 109.75 yen per U.S.dollar.Did you gain or lose on the hedge? How much?

Question

Quizplus · Accepted Answer

To calculate the gain or loss on the hedge, we need to compare the cost of the payment in the spot market to the cost through the forward contract. 
Cost of payment in spot market = Yen 100,000,000 / 109.75 = $910,426.54
Cost of payment through forward contract = Yen 100,000,000 / 111.25 = $899,140.21
Therefore, the company saved $11,286.33 by hedging. However, since the forward rate was worse than the spot rate, there is a loss on the hedge. The loss is calculated as follows:
Loss on the hedge = Cost in spot market - Cost through forward contract = $910,426.54 - $899,140.21 = $11,286.33
Since this amount is negative, the correct choice is (B) loss, $12,285.33.

You Are a Financial Manager with ICN,Co