IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/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 agreed to purchase 100,000 euros at a rate of $1.60/euro, which means IBM agreed to pay $160,000 (100,000 euros x $1.60/euro). However, one year later, the spot exchange rate is $2/euro. Therefore, to receive 100,000 euros, IBM needs to pay $200,000 (100,000 euros x $2/euro). Therefore, the dollar amount that IBM must pay to receive the euros is $200,000, which is option B.

IBM Enters into a Forward Contract to Purchase 100,000 Euros