IBF Group 6_Inclass Assignment#3

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Course : International Banking and Finance INTL 702(007) Assignment Title : In-Class Assignment #3 Group 6 : Ashwini Sharma Preksha Patel Saumya Shah Sakshi Patel Sarveshwar Modi Professor : Francis Olatoye Due Date : March 17, 2024
Question 1. If you enter into a forward contract to sell a currency, in this case the euro, in the future, the forward rate will be agreed when the contract is made. This interest is based on the current interest at the time of the Agreement, adjusted by the difference in interest between the two relevant currencies. For example, if the spot rate on June 28, 2022, were $1.10 for each euro, the forward would be locked in at that rate for a sale of 10,000 euros. To determine if you are better or worse. This contract depends on the spot rate and the locked forward rate. If the euro is weak against the USD - meaning the current exchange rate is below $1.10/euro - you are better off because you are selling euros at a higher rate than the market rate. Conversely, if the euro strengthened - meaning the current spot rate is higher than $1.10/euro - you would be worse off because you could sell your euros at a higher price on the open market. The value of a forward contract is in the hedge it provides against currency fluctuations, protecting you when the currency moves against you, but can also limit your profits when the currency moves in your favor. Question 2: Let's compare these two rates: Forward Contract Rate: 1 Euro = 1.18 USD (FRED, 2024) Spot Exchange Rate: 1 Euro = 1.01 USD (FRED, 2024) Since the forward contract rate (1 Euro = 1.18 USD) is higher than the spot exchange rate (1 Euro = 1.01 USD) on the maturity date, the exporter is in a favorable position. Here's why: Benefit to the Exporter: The exporter is obligated to sell their 10,000 Euros at the higher rate of 1.18 USD per Euro, as per the terms of the forward contract. This means that despite the
decrease in the spot exchange rate over the contract period, the exporter can still sell their Euros at a higher rate than the current market rate. Locking in Profit: By entering into the forward contract when the exchange rate was favorable (1 Euro = 1.18 USD), the exporter effectively locked in a higher selling price for their Euros. This protects them from potential losses resulting from adverse movements in the exchange rate. Given the comparison between the forward contract rate and the spot exchange rate on the maturity date, the exporter is better off having entered into the forward contract. They can sell their Euros at a higher rate than the current market rate, ensuring a favorable outcome for the exporter. Question 3: According to (“Pros and Cons of a Forward Contract,” 2020), The forward contract is clearly advantageous if you enjoy certainty. The trade war with China has an impact, the Federal Reserve's activities and policies, and even unstable internal politics can all exert pressure on the dollar and other currencies and provide swings. When it comes to bigger amounts, even a small fluctuation of a percentage point in the exchange rate can have a significant impact. A forward contract helps you control expenses within a set budget when you place large orders from foreign suppliers or have long-term agreements elsewhere. Currency fluctuates both ways; a forward contract hedges against potential losses and protects your company from gains in the event that the value of the dollar declines. You can be forced to pay less than the going rate if the value of the dollar increases. A forward contract provides confidence if you are risk-averse or operate within tight budgetary constraints. A lot relies on your attitude toward risk and what the firm can tolerate. Other currency tools that track and target rates might be a useful approach to manage your foreign payments if you can tolerate a little risk and your company can weather any currency declines or wait for the rates to improve.
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