Foreign exchange currency risk and forward market hedge

Reference no: EM1310461

Q1) Assume a U.S. firm purchase $200,000 worth of television tubes from the Mexican manufacturer for delivery in sixty days with payment to be made in 90 days (30 days after goods are received). Rising U.S. deficit has caused dollar to reduce against peso recently. Current exchange rate is 5.50 pesos per U.S. dollar. 90-day forward rate is 5.45 pesos/dollar. Firm goes into forward market today and purchases sufficient Mexican pesos at 90-day forward rate to fully cover its trade obligation. Suppose spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How many in U.S. dollars did firm save by eradicating its foreign exchange currency risk with its forward market hedge?

Reference no: EM1310461

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