Question

Suppose you are a US importer of gypsum from Canada. You have a contract with a US firm to sell them 10 tons of gypsum 30 days from now. You want to use the forward market to avoid exchange rate risk and guarantee yourself a profit. The Canadian Dollar (CD) price of gypsum per ton is 5000 CD. The 30 day forward rate is 1.25 CD/$ and the contract with the US firm is that you are selling the gypsum is for $ 4500 per ton. Calculate your profit, per ton, in terms of US dollars.

Answer 1

Price of gypsum in canadian dollar= 5000 per ton

The forward rate is 1.25 CD/$

The selling price of gypsum in american dollar = $4500 per ton

To guarantee a profit, importer will use this forward rate and now the cost of per ton of gypsum for the importer in American dollar=

5000/1.25 = $4000 per ton

So the profit earned per the importer in American Dollars = $4500 - $4000 = $500 per ton

So the importer will earn a profit of $500 per ton.