Suppose a European company has a subsidiary in the United States that generates revenue in USD. The
Question:
Suppose a European company has a subsidiary in the United States that generates revenue in USD. The company has a forecasted revenue of USD 5,000,000 in 3 months. The current spot exchange rate is EUR/USD 1.20, and the 3-month forward exchange rate is EUR/USD 1.18. The company wants to hedge its currency risk by entering into a forward contract with a notional amount of USD 5,000,000 and a 3-month maturity. The company's cost of funds is 3% per annum in Europe and 2.5% per annum in the United States. Calculate the fair value of the forward contract and the net cash flow for the company in EUR if it enters into the forward contract.
(You may assume a 360-day year for interest rate calculations.)
Spreadsheet Modeling & Decision Analysis A Practical Introduction to Management Science
ISBN: 978-0324656633
5th edition
Authors: Cliff T. Ragsdale