Question

Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced 64 million payable in six months. Currently, the six-month forward exchange rate is $1.09/∈ and the foreign exchange advisor for Cray Research predicts that the spot rate is likely to be $1.05/6 in 5ix months. What is the expected gain/loss from the forward hedging?

a) $139.799 gain
b) $160.000 gain
c) $160,000 loss
d) $139,799 loss

Answer 1

Cray Research would gain an expected $2.56 million from forward hedging when comparing the forward exchange rate with the predicted spot rate. This result does not match any of the provided answer choices, indicating a possible mistake in the question or answers.

Step-by-step explanation:

To calculate the expected gain or loss from the forward hedging for Cray Research, we need to compare what Cray Research would receive at the forward rate versus what it expects to receive at the predicted spot rate. The invoice is for 64 million euros payable in six months.

Using the forward rate of $1.09/€, Cray Research would receive:

64 million * $1.09/€ = $69.76 million

Using the predicted spot rate of $1.05/€, they would receive:

64 million * $1.05/€ = $67.2 million

Therefore, the expected gain from hedging would be:

$69.76 million - $67.2 million = $2.56 million gain.

However, this number does not match any of the provided answer choices. It appears that there may be a mistake in the question or the answer choices provided. Therefore, we cannot select one of the proposed options a) $139,799 gain, b) $160,000 gain, c) $160,000 loss or d) $139,799 loss, with the information given.