Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enters into an agreement to buy the wine at a price of 30 euros to the case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro.If the spot exchange rate at the end of November is $1.50/euro,the payoff to Hudson Valley for hedging is ________.

Question

Quizplus · Accepted Answer

To calculate the payoff to Hudson Valley, we need to compare the cost of purchasing euros with the forward contract and the spot exchange rate at the end of November.

10,000 cases of Beaujolais Nouveau at 30 euros/case = 300,000 euros
Cost in USD at the forward rate of $1.30/euro = $390,000

If the spot exchange rate at the end of November is $1.50/euro, then the cost in USD would be:

300,000 euros x $1.50/euro = $450,000

Therefore, the savings from hedging would be:

$450,000 - $390,000 = $60,000

Since the question asks for the payoff to Hudson Valley, which refers to the savings or benefit from hedging, the answer is C) $60,000.

Hudson Valley Distributors Wants to Be Sure It Has 10,000