IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/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

If IBM had purchased euros in the spot market, they would've paid $2/euro, which means 200,000 euros would have cost them $400,000.

However, IBM entered into a forward contract and agreed to purchase euros at a rate of $1.90/euro, regardless of the spot exchange rate one year later.

Therefore, IBM will only pay 200,000 euros x $1.90/euro = $380,000 in one year, regardless of the spot exchange rate.

Thus, the answer is (C) $380,000.

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