Hedging: Tamcon Industries has purchased equipment from a Brazilian company for a total cost of 1,272,500 Brazilian reals (BR). The company has to pay in 30 days. Citicorp has given the company a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar.

Question

Quizplus · Accepted Answer

By using the forward contract, Tamcon locks in a rate of $0.6123/BR, paying $779,152.75 (1,272,500 BR * $0.6123). Without hedging, at the spot rate of $0.6317/BR, they would pay $803,837.75 (1,272,500 BR * $0.6317). The savings is $803,837.75 - $779,152.75 = $24,685, which rounds to $24,687.

Hedging: Tamcon Industries Has Purchased Equipment from a Brazilian Company