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Explain how one might establish a forward contract

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Reference no: EM132775964

The firm, Cheesis Fin Inc., is a British manufacturer of fine Stilton cheese. Firm believes one can sell the product effectively in France. The firm have recently agreed to sell a large container of cheese for 40,000 euros in six months' time. The spot rate of exchange between euros and pounds is 1.6 euros/pound. The forward rate for a transaction in six months is 1.55 euros/pound.

Discuss the following questions/statements:

-Explain how one might establish a forward contract to mitigate your transaction exposure in this instance. What will be your expected future cash flow in pounds?

-If one expects the future spot rate in six months to be 1.5 euros/pound, will this influence the firm decision?

-Suppose firm decides to undertake the forward transaction, what happens if in four months firm learns that the cheese has spoiled and firm cannot deliver on the promised side of the transaction?

-Why international trade is more difficult and risky from the exporter's perspective than is domestic trade.

-What is the Best consideration - Should a country's government assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?

Reference no: EM132775964

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