Question

exports products to a French firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Crylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Crylon will receive $____ for the euros.

Answer 1

Answer: 220,000

Step-by-step explanation:

Given the following ;

Spot rate (June 1)= $1.12

Forward rate ( June 1) = $1.10

Spot rate ( September 1) = $1.15

Contract amount = €200,000

Crylon will receive :

Contract amount × forward rate(June 1)

= 20,000 × 1.10 = 22,000

Transaction or business negotiation may take place immediately or at a later time. Rates attached to business taking place immediately or at the moment is called the spot rate. While prenegotiated transactions which will occur at a prefixed time in the future are contracted using the forward rate.

Crylon had already negotiated with the bank and the transaction isn't taking place immediately. Therefore, the forward rate will be applied, which will be the value at the time the negotiation of the contract took place and not the rate at the time the transaction will be triggered. Hence the reason for using the forward rate as at June 1, which is the rate at the time of negotiating the contract.

Answer 2

Crylon will receive $220000 for the euros.

Step-by-step explanation:

Spot rate is the current market value price of a any goods or services at that moment.

Forward rate is the interest added to a transaction that would take place in the future.

Crylon will receive payment for the euros based on the three month forward rate of $1.10. Therefore, craylon will receive €200,000 × $1.10 = $220000.

Crylon will receive $220000 for the euros.