Suppose you are a U.S. based company and imports goods from the Italy (part of Euro currency). In 60 days, you will need to pay for a shipment of goods from the Italy in EUR for 500,000. The US risk free rate is 2.6% and the EUR risk free rate is 4.5%, and the current FX spot rate is $1.23 per EUR.
A. You expect the EUR currency to increase against the US dollar over next 60 days. Please explain, whether you should buy or short a forward contract on the FX currency to hedge the foreign exchange risk?
B. What is the no-arbitrage profit “Interest Rate Parity” forward price to enter a forward contract expiring in 60 days? (up to 4 decimal places)
C. After 30 days since the US company entered into a forward contract agreement (at “Interest Rate Parity” forward price), the FX spot price for USD per EUR is now, $1.19 per pound. The US risk free and EUR risk free interest rates have stayed the same. What is the value of the US company’s position in the Forward contract at this 30-day mark of the 60-day forward contract? (up to 4 decimal places)
NOTE: (state gain or loss on the currency rate and the total Amount based on cash settlement)
D. At expiration of the forward contract (at 60 days), assuming forward price agreed was “Interest Rate Parity” price, and the USD per EUR currency spot price is $1.26 per pound, what is the value of the US Company’s forward contact position? (up to 4 decimal places) (2 points)