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The US$/European spot rate is quoted currently at 1.9612 – 1.9618 Dollar/Euro. the 3 month forward rate is quoted at $ 0.0012 – 0.0006 premium in Europe. A US company is expecting to receive Euro 2.5 million in three months time and would like to hedge this using a forward contract.
What willbe the US$ receipt in 3 months time?The following is their calculation.
1.9612 – 0.0012 = $1.96/ Euro
US co will receive Euro 2.5m/1.96 = $1275510.I think Euro receivable should be multiplied with the forward rate instead of dividing.
Please, help me, sir!I don’t know where you found this question, but assuming that you have typed it correctly then the answer is wrong.
You are correct that they should multiply rather than divide.
Dear Mr Moffat,
This “strange” solution of Kyaw’s question is AGAIN from our BELOVED and FAMOUS BPP Revision Kit! And this is only one of many errors in many revision books of BPP. I think this publisher should review themselves and learn from Opentuition what is the true quality of education!
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