A U.S.firm has a €1 million payment due to a Dutch firm in 90 days.The current spot rate is $1.00 per euro,and the 90-day forward rate is $1.11.Ben forecasts that the spot rate in 90 days will be $0.99.Jerry forecasts that the spot rate will be $1.12 in 90 days.The actual spot rate in 90 days turns out to be $1.10.If the U.S.firm follows Ben's forecast,it would:
A) buy euro in the forward market at$1.11.
B) wait and buy euro 90 days later at $1.10.
C) buy euro now at $1.12 and let it sit in the company's safe.
D) wait and buy euro in the forward market 90 days later at $1.11.

Question

Quizplus · Accepted Answer

If the U.S. firm follows Ben's forecast and waits for 90 days to buy euro, it can buy it at the actual spot rate of $1.10, which is lower than the forward rate of $1.11. This would save the firm money as it avoids paying a premium (the difference between the forward rate and actual spot rate). Therefore, B is the best choice. A, C, and D would all result in the firm paying a premium.

A USFirm Has a €1 Million Payment Due to a Dutch