ABC corporation makes a purchase of cyrstal glassware from a firm in Germany for

Question

ABC corporation makes a purchase of cyrstal glassware from a firm in Germany for 39,960 marks or $2400 at the spot rate of 1.665 mark per dollar. the terms of the purchase are net 90 days , and ABC wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk . Suppose the firm completes a forward hedge at the 90 day forward rate of 1.682 marks. if the spot rate in 90 days is actually 1.638 marks , how much will ABC have saved in the US dollar by hedging its exchange rate exposure.

PLease show work.

Explanation / Answer

IF ABC would not have covered then payable at 90 days= 39960/1.665 = $24000

With forward rate hedge it would be paying = 39960/1.682 = $23757.43

So ABC had saved = $242.57

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