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

The forward contract locks in a rate of 111.25 yen per dollar, but the spot rate is 109.75 yen per dollar. This means you are paying more yen per dollar than the market rate, resulting in a loss. The loss is calculated as (111.25 - 109.75) yen per dollar * (100,000,000 yen / 111.25 yen per dollar) = $12,285.33.

You Are a Financial Manager with ICN,Co