•A US company has bought a machine worth 3 million euros from a German manufacturer with payment due in three months.The treasurer finds that DeutscheUSA (a fictitious name),a large commercial bank,bids euros for $1.5000 and offers euros for $1.5010 in three months' time.He readily agrees and locks in that price.
•Suppose DeutscheUSA would like to hedge its trade.It finds that a German importer hoping to buy 2 million euros worth of computer parts from the United States in three months' time.They also agree to trade.
-What is the price risk exposure remaining for DeutscheUSA?

Question

Quizplus · Accepted Answer

DeutscheUSA is exposed to the risk of the euro depreciating against the US dollar between now and the time when it is due to purchase 2 million euros of computer parts from the US. If the euro depreciates, DeutscheUSA will have to pay more US dollars to purchase the 2 million euros. Therefore, the price risk exposure remaining for DeutscheUSA is the amount of euros it needs to purchase for the computer parts, which is 2 million euros, in three months' time, which is when the payment is due for the machine purchased from the German manufacturer. Therefore, the correct answer is option D: 1 million euros in three months' time.

•A US Company Has Bought a Machine Worth 3 Million