Payless Shoes has a shoe contract with a Taiwanese supplier. The T$30 million purchase is invoiced in new Taiwan dollars (T$) and is due in three months. The current spot and 3-month forward exchange rates are T$30/$.
a. Draw Payless' expected future cash flow in new Taiwan dollars on a time line.
b. Draw a risk profile for Payless in terms of U.S. dollars per new Taiwan dollars.
c. If the actual spot rate in one year is T$25/$, how much gain or loss will Payless have assuming it does not hedge its currency exposure?
d. Form a forward market hedge. Indicate how the hedge eliminates foreign exchange exposure by identifying the forward contract's cash inflows and outflows on a time line and constructing a payoff profile of the forward contract.