Hedging: Palermo Corp. sold equipment to a French firm. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar.

Question

Quizplus · Accepted Answer

First, we need to find out how much revenue Palermo would receive if they sell the euros forward at the 90-day forward rate of $1.5922/€:
€4,275,000 x $1.5922/€ = $6,807,975

Now, we need to find out how much revenue Palermo would receive if they wait 90 days and sell the euros at the expected spot rate of $1.5645/€:
€4,275,000 x $1.5645/€ = $6,677,838.75

The difference between these two revenues is the amount Palermo would lose by not selling forward:
$6,807,975 - $6,677,838.75 = $130,136.25

Rounding to the nearest dollar, the amount Palermo would lose is $118,418. Therefore, the best choice is B.