Question

Apple expects to receive 5 million euro from Euro Area sales in December 2017. In June 2017, the 6-month forward rate is USD/EUR 1.1438-48 and the spot rate is USD/EUR 1.1418.

(a) How can Apple hedge currency exposure in the forward market? Describe the FX issue, the hedging strategy, and explain for which range of future spot rates Apple will make a profit or a loss on the forward contract.

(b) Present a graphical solution of your results (y-axis: cash-flows, x-axis: spot rate). Please report values on the two axes and indicate profits and losses on the graph.

Answer 1

Apple needs to sell 5 million euro 6 month forward at rate of USD/EUR 1.1438.

Apple will make a profit for any Future Spot Rate lower than USD/EUR 1.1438.

Apple will incur Loss for any Future Spot Rate greater than USD/EUR 1.1438.

At Future Spot Rate of 1.1438, Apple would neither make profit nor incur loss.
(b) CASH FLOW Husdimittion Feenwoord Contract стаи Соə - Probit 5.76 To Loss 5.720 Loss 5.72 5.719 5.70 TT 5.17 5.68 5-66 1.1435 1.1438 1.1440 FUTURE SPOT RATE Any Point Above forward Contract Carla flow, or Future Spot Pate greater than 1.1438, Apple will incurr loss. Any point Below forward Conteract Cash flow are future spot Rate less than 1.1458 Apple will make a profit. At forward Contract Cash flow or future Spot Rate of 1.1438, Apple will neither make a profit or incuar less

Wh e it will receive only 5.719 millan USD lan forward contract, which is lesser than 5.72 million USD received by selling A future market. Il future. Spet Rate in lesser than 1.1438 Apple would gain or make profit for frample Future Spot Rate is 1.1435 | | Apple sells furo in market, it would receive 5,717,500 OSA [5 million Euro x 1.14351 while it will receive 5.719 million USD on forward Contract which is greater. Futwee Soot Rate Opole would less than 1.1458 Make Profit 1.4438 L No Profit Nol Greater than 1.1458 عمر من مرگ

Answer (a) Information given in question Apple Cupects to receive 5 million Ewro I Spot Rate tusol EUR): t. 1418 6 month Forward Rate (USD/EUR): 1.1438/1-1448 1 Apple is expected to receive 5 million fused it has Risk of Eweo depreciation and | USD (Dollar) Appreciation Apple needs to sell Ewrs and Buy UCD Apple cuters into contract ol Selling Euro 6 month forward at Forward Rate of 1- 1438 I 4.e Bid 6 month forward Losol EUR) et 1.1438 Alter 6 months Apple will receive i million ton x il forward 5 million Euro x Bid 6 month = 5. VOO 000 X 1.1438 5.719 000 USD or 5.719 million USD. Ib Future Spot Rate is equal to I 6 mouth forward Rate ie 1.1438, Then Aople would be at break even je It will neither incul loss nor gain profit It future Spot Rate greater than 1.1438, I hople would inaa loss Bernina Pro for Crample Future Spot Rate is 1- 1440 T Roole sell Ewro in market, it would I vereive 5.72 million USD 5 millia 2 million Eweo x 1.14907