•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 DeutscheUSA's profit and risk exposure after three months time?

Question

Quizplus · Accepted Answer

DeutscheUSA's profit can be calculated by subtracting the rate at which they have agreed to buy euros ($1.5010) from the rate at which they are selling euros ($1.5000), which gives us a profit of $0.0010 per euro.

For the hedge trade, DeutscheUSA is selling 2 million euros to the German importer. If the exchange rate moves unfavorably for DeutscheUSA, they could end up with a loss on this trade. Therefore, they have a risk exposure on 2 million euros.

However, DeutscheUSA only needs to hedge half of this risk exposure, which is 1 million euros. This is because they have already locked in a favorable exchange rate for the other 1 million euros they will receive from the US company.

Therefore, the correct answer is D, which states that DeutscheUSA has a profit of $2,000 US dollars plus risk exposure on 1 million euros.

•A US Company Has Bought a Machine Worth 3 Million