Question

Please explain number one in detail, I'm trying to understand how and why you divide vs multiply the $30 Million USD by the forward rate!

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

04:03 W F voraux 23 ENG , 31-03-2020 ... o X ILLIMIN TOP 10803 IL IK 803 AIRBUS SOLD AIRCRAFT TO DELTA AIRLINES, A US COMPANY 804 WE BILLED THEM 30 MILLION DOLLARS 805 806 THE PROBLEM IS THAT PAYMENT WILL BE IN 6 MONTHS 807 AND SO WE DON'T KNOW WHETHER WE WILL GET SAME AMOUNT OR LOWER AMOUNT 808 AFTER 6 MONTHS IN EUROS 809 810 SO THERE IS A EXCHANGE RISK INVOLVED 811 812 OUR CURRENCY IS EURO, BUT THE PARTY WILL PAY US IN DOLLARS 813 SO WE HAVE TO CONVERT IT INTO EUROS 814 AT CURRENT RATE, WE WILL GET 1.05 DOLLAR PER EURO 815 WHICH IMPLIES FOR EVERY 1.05 DOLLARS, WE WILL RECEIVE 1 EURO 816 SO TODAY AMOUNT IN EUROS = 30 MILLION / 1.05 = 28.57 MILLION EUROS = 28571428.57 EUROS 817 818 THIS AMOUNT CAN BE HIGHER OR LOWER IN 6 MONTHS DEPENDING ON EXCHANGE RATE 819 AFTER 6 MONTHS 820 SO TO SAFEGUARD OURSELVES, WE CAN HAVE ONE OF THE OPTIONS 821 822 823 824 825 FIRST OPTION : FORWARD CONTRACT WHICH IMPLIES THAT WE AGREE TODAY THAT AFTER 6 MONTHS WHATEVER BE THE ACTUAL RATE, I WILL PAY THE PARTY 30 MILLION DOLLAR AND OTHER PARTY WILL PAY ME = 30 MILLION/ 1.10 = 27.27 MILLION EUROS = 27272727.27 EUROS THIS IS GUARANTEED AMOUNT IN EUROS THAT AIRBUS WILL RECEIVE 826 027 KE CAPM | UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLO Q DIR right clean YIELD bc ... Đ :