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CFA Level 2
Derivatives

Currency Forward Hedge Amount Calculation

Medium Forward Pricing And Valuation Currency Forwards

ABC Corporation, based in the United States, is planning to expand its operations into Europe and expects to receive €5 million in six months. To hedge against the risk of a potential appreciation of the Euro against the US Dollar, ABC Corporation decides to enter into a currency forward contract to lock in the exchange rate. The current spot exchange rate is $1.20 per Euro, and the six-month forward exchange rate is quoted at $1.25 per Euro.

Given this scenario, what will be the amount in US Dollars that ABC Corporation would receive from the currency forward contract if they lock in the forward rate?

Hint

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% Correct72%