Sample Essay

Swiss Franks to be received in 1 year = SF600,000

Spot rate = $0.39/SF

1 year forward rate = $0.40/SF

As the exporter will be receiving the amount mentioned above in one year’s time and wants to enter into a forward hedge, he will contract to exchange the amount received into dollar but entering into a currency forward contract to purchase dollars for Swiss franks one year from now at the forward rate of $0.40/SF.

In absence of information regarding cash needs of the exporter at current time period or any other details, this means that value of the exports one year from now will equal:

= 0.40 x 600,000

= $240,000

Therefore, C is the correct answer.

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