Your treasurer told you how at a previous employer she designed a forward contract on EUR, against
Question:
Your treasurer told you how at a previous employer she designed a forward contract on EUR, against USD. She purchased EUR 1m and as of today 60 days remain until expiry. The historic rate was 1.350 while the current rate for same expiry date is 1.500. Assuming the risk-free rates are 3% (simple p.a) in USD and 4% (simple p.a) in EUR, you want to evaluate the treasurer's decision to do so.
Provide at least two real-life examples how this forward contract could have been used as a hedging instrument. In each example comment on whether the hedger is better off or worse off, and whether hedging was a correct decision in the first place, and what are the alternative ways to hedge when perfect cash-flow matching is not possible.
International Finance Putting Theory Into Practice
ISBN: 978-0691136677
1st edition
Authors: Piet Sercu