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Suppose a U.S. firm buys $300,000 worth of textiles from a Peruvian manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the Peruvian Nuevo Sol recently. The current exchange rate is 3.3 Nueva Sols per U.S. dollar. The 90-day forward rate is 3.25 Nueva Sols/dollar. The firm goes into the forward market today and buys enough Peruvian Nuevo Sols at the 90-day forward rate to completely cover its trade obligation.

Question Assume the spot rate in 90 days is 3.0 Nuevo Sols per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92087257

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