FRM Part I · FRM Exam Part I · Foreign Exchange Markets
A company will receive EUR 4 million in six months and sells it forward at 1.1000 USD per EUR. At maturity the spot rate is 1.1300. Compared with remaining unhedged, what is the outcome of the forward hedge in USD?
The forward hedge leaves the company USD 120,000 worse off than being unhedged. Hedged proceeds are USD 4.4 million at 1.10, while selling at spot 1.13 would have produced USD 4.52 million, because the euro appreciated.
- AGain of USD 120,000 from hedging
- BLoss of USD 120,000 relative to being unhedgedCorrect
- CLoss of USD 30,000 relative to being unhedged
- DGain of USD 30,000 from hedging
Explanation
Hedged proceeds = 4m x 1.10 = 4,400,000. Unhedged = 4m x 1.13 = 4,520,000. The hedge gives up 120,000 relative to being unhedged.
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