Hedging EUR currency risk from the US perspective

Terabit Inc is an American exporting company of electronic components to countries

in the Euro area. The company mainly sells its products in Euro, being their clients unwilling to bear any exchange risk. The annual turnover for Terabit is €30.2m. The company's policy allows a monthly hedge, with a 60 days collection period (distance from the invoice issued to the payment

date). The current USD/EUR exchange rate is 0.8 (number of euros per dollar), while the interbank rates are the following (view image)

a. The first quarter risk exposure (in both currencies)

c. The 3-month forward contract value if the contractual delivery price is set at the current exchange rate (assume one contract for the quarterly exposure)

 

If the contractual delivery price is set at the current exchange rate of 0.8, the 3-month forward contract value can be calculated as follows:

When computing the rate differential, where do the data 1.80% and 1.20% come from? 

And why on the fair exchange forward rate is it 0.80 - 0.0015 and not 0.80 + 0.0015 if € is appreciating? 

Transcribed Image Text:

Month S EUR USD 1 0.85% 1.65% 2 0.98% 1.75% 3 1.12% 1.80% 6 1.22% 1.93% 12 1.30% 2.02% 71 K Month S EUR USD 1 0.85% 1.65% 2 0.98% 1.75% 3 1.12% 1.80% 6 1.22% 1.93% 12 1.30% 2.02% 71 K

Answer rating: 100% (QA)

Youre right my previous explanation of the forward rate calculation was incorrect Let me walk thr... View the full answer