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.Whose advice,between Ben and Jerry,will save the company's money?
A) Ben
B) Jerry
C) Both Ben and Jerry
D) Neither Ben nor Jerry

Question

Quizplus · Accepted Answer

If the U.S. firm uses the 90-day forward contract at the rate of $1.11, they would have to pay €1,110,000, which is $1,110,000 ($1.11 per euro x €1,000,000). However, if they use Ben's advice and wait for the spot rate to be $0.99 in 90 days, they would only have to pay $990,000 ($0.99 per euro x €1,000,000), saving them $120,000. Jerry's advice would require them to use the 90-day forward contract at the rate of $1.11, which is not as beneficial as waiting for the spot rate to be $0.99. Thus, Ben's advice saves the company money.

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