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

In a forward contract, the price agreed upon initially (in this case, $1.60/euro) is the price that will be paid regardless of the spot exchange rate at the time of the actual exchange. Therefore, IBM will pay $1.60 for each of the 100,000 euros, totaling $160,000.

IBM Enters into a Forward Contract to Purchase 100 000