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Order from Razon:

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Order from Zug:
b. Order from Zug is $1,840,000 as just calculated. The expected cost of offsetting the hedged cash flows is $100,000 as explained next. Brooks sold A$1 million forward. It will purchase them in the spot market and then will fulfill its forward contract. The expected future spot rate in 1 year is $.46, so it would be expected to pay $.46 and sell A$ at the forward rate of $.47 for a $.01 profit per unit. For A$10 million, the profit is $.01 × 10 million = $100,000

1399_kk.jpg

(An alternative method would be to apply the $.47 to Zug for A$4 million, which would leave a net of A$6 million to fulfill on the forward contract. The answer will be the same for either method.)

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