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Draw the risk profile of goo ltd

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Question - Goo ltd, a German company, sells its products worldwide and typically the company uses forward contracts. It is due to pay a US supplier $21.5 million in three months' time for machinery for which Goo ltd. has already found a buyer within Germany for Euro 17 million. Today's exchange rate is $1.45 - 1.47 /1 euro. The company is proposing to take out a forward contract to purchase $21.5 million in three months' time. The forward rate quoted by the bank is of $1.42 - 1.45/1 euro.

Required - Draw the risk profile of Goo ltd illustrating the current cost at spot, the cost if the forward is used, the profit margin if the forward is used and the breakeven exchange rate. Consider the financial implications of the forward contract assuming a) the $ weakens and Euro strengthens in three months' time to $1.49- $1.50/ 1 euro and b) the $ strengthens and Euro weakens in three months' time to $1.28-$1.29/1 euro.

Reference no: EM132937429

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