Question
A company based in the United States is expecting to
receive a payment of 10 million euros in next two months. The company is concerned about the fall in the value of euros and is thinking of entering into a forward contract to hedge the position. What will be the value of 10 million euros in US dollars, if the company hedges the position of exchange rate risk with a forward contract of 1.5 USD/EUROSolution
As the company has hedged its currency exchange rate risk by entering into a forward contract at a future date (two months), the value of the amount it will receive will be = 10 million EURO * 1.5 (USD/EURO) = 15 million USD.
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