Suppose Snooty Wine Importers has an order of Chateau de Snoot wines arriving from France in October,and the order will be paid in euros.If Snooty enters a contract today with a forward rate of 0.9 euros per U.S.dollar for October delivery,and the spot rate in October turns out to be euro 0.85 per U.S.dollar,what is the effect of the forward contract on Snooty?

Question

Quizplus · Accepted Answer

Since the forward rate is higher than the spot rate, Snooty is obligated to purchase euros at a higher price than the market rate in October. This means that Snooty will have to pay more U.S. dollars than they would have if they had waited to purchase euros at the spot rate in October. Snooty will lose money on this forward contract, which is equal to the difference between the forward rate and the actual spot rate multiplied by the value of the contract. In this case:
(0.9 - 0.85) x 100,000 euros = $5,000 x 7.5 (using the exchange rate of $1.00 = euro 0.85) = $37,500. Therefore, the correct answer is B, Snooty Importers lost $37,500.

Suppose Snooty Wine Importers Has an Order of Chateau De