LEVUMU TIRE Chapter 12 Assignment Back to Assignment Attempts Average/2 3. Hedging translation exposure with forward contracts 1. 2. STEP-2 of 2 Suppose that Warner Co is a US-based MNC with a major subsidiary in France. This French subsidiary deals in euros, and is expected to earn 40 million euros next year. However, as these euros will stay with the subsidiary in France, Warner is concerned about translation exposure To hedge against this translation exposure, Warner decides to sell 40 million euros forward. Wamer can then purchase euros at the prevailing spot rate. in one year to fulfill the forward contract. Suppose that the forward rate for euros is $130 and the spot rate for euros currently is also $1.30. Assume that the euro does indeed depreciate to a weighted average exchange rate of $1.10 over the coming year. Warner still must fulfill its forward contract to sell 40 million euros at the forward rate of $1 30. Warner eams million from the sale of euros at the forward rate. However, in order to obtain the needed 40 to sell, Warner needs million. Thus Warner million from this forward contract. Grade Final Siop TOTAL SCORE: 0.67/2 Grade It Now Save & Continue Q OL