Suppose the exchange rate on the 180-day forward contract, Ask an Expert

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Suppose the exchange rate on the 180-day forward contract on the Swiss franc is $0.80 per Swiss franc. Current spot exchange rate is $0.70. You live in the U.S. but are considering the purchase of a shipment of Swiss watches costing 10 million Swiss francs. The merchant in Zurich has promised you that the cost of the shipment will not change over the next 180 days. But you worry that the dollar will weaken further against the Swiss franc, making the dollar-cost of the shipment more expensive than at present. To hedge this foreign exchange risk, you buy the 180-day forward contract on Swiss francs at the quoted rate.

1. Without a forward contract, what is the dollar-cost of the shipment if the spot exchange rate at the time of purchase is $0.75?

2. With a forward contract, calculate the total cost in USD.

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