A US company has bought a machine worth 3 million euros from a German manufacturer with payment
Question:
A US company has bought a machine worth 3 million euros from a German manufacturer with payment due in three months. The treasurer finds that DeutscheUSA (a fictitious name), a large commercial bank, bids euros for $1.5000 and offers euros for $1.5010 in three months’ time. He readily agrees and locks in that price. Suppose DeutscheUSA would like to hedge its trade. It finds that a German importer hoping to buy 2 million euros worth of computer parts from the United States in three months’ time. They also agree to trade.
(a) What is the price risk exposure remaining for DeutscheUSA?
$1 million US dollars today
$2 million US dollars in three months’ time
3 million euros today
1 million euros in three months’ time
None of these answers are correct.
(b) What is DeutscheUSA’s profit and risk exposure after three months time?
a profit of $1,000 US dollars plus risk exposure on $2 million dollars
a profit of $2,000 US dollars
a profit of $2,000 US dollars plus risk exposure on $1 million dollars
a profit of $2,000 US dollars plus risk exposure on 1 million euros
None of these answers are correct.
Auditing and Assurance Services
ISBN: 978-0077862343
6th edition
Authors: Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws