CFA Practice Question

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CFA Practice Question

Suppose a U.S. firm buys good from Thailand with a payment of Thai baht 2,000,000 due in 90 days. The current price of the baht is U.S. 0.02532. The U.S. firm wishes to hedge its currency risk by entering into a 90-day forward contract with a bank at a price of $0.02545. In 90 days the spot rate for Thai baht is $0.02528.
A. The firm can choose not to fulfill the contract because the spot rate at the time the baht payment is due is less than the forward contract price.
B. This means the firm will pay the bank $50,560 to fulfill its part of the forward contract.
C. This means the firm will pay the bank $50,900 to fulfill its part of the forward contract.
Explanation: The firm pays the bank the price agreed on in the forward contract: 0.02545 x 2,000,000 or $50,900. The firm experiences a loss on the contract because the forward price is greater than the spot rate at the time the baht payment must be made. If it had paid at the spot rate at the time the money was due, it would only have paid 2,000,000 x 0.02528 = $50,560.

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