IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today.If the spot exchange rate is $2/euro one year later,what is the dollar amount that IBM must pay to receive the euros.

Question

Quizplus · Accepted Answer

According to the forward contract, IBM agrees to purchase 200,000 euros at a rate of $1.50/euro, one year from today. Therefore, the total cost to IBM would be:

200,000 euros x $1.50/euro = $300,000

However, at the time of settlement (one year later), the spot rate has changed to $2/euro. Therefore, if IBM were to purchase the euros at the spot rate, the cost would be:

200,000 euros x $2/euro = $400,000

Since IBM has already entered into a forward contract at a lower rate, they can purchase the euros at the agreed-upon rate of $1.50/euro, saving them money.

Thus, the dollar amount that IBM must pay to receive the euros is $300,000. Therefore, the correct answer is option D.

IBM Enters into a Forward Contract to Purchase 200,000 Euros