Suppose a U.S.firm buys $200, 000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

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Quizplus · Accepted Answer

Obligation is for 200, 000 ×5.50 = 1, 100, 000 pesos.1, 100, 000/5.45 = cost of forward contract = $201, 834.86.Spot rate in 90 days = 5.30 pesos per U.S.dollar.1, 100, 000/5.30 = cost of spot rate in 90 days = $207, 547.17.Spot cost - forward cost = $207, 547.17 - $201, 834.86 = $5, 712.31.