An American manufacturing company has imported industrial machinery at a price of DM4.6 million. The machinery will be delivered and paid for in six months. For planning purposes, the American company wants to establish what the payment (in dollars) will be in six months. It decides to use the forward market to accomplish its objective. The company contacts its New York bank, which provides the quotations given in Table. The bank states that it will charge a commission of 1% on any transaction.
a) Does the American company enter the forward market to go long or short of forward DM?
b) What is the number of DM/$? What is the dollar value of the deutsche mark?
c) What is the equilibrium forward rate for the deutsche mark expressed as DM/$?
d) Does the commission increase or decrease the number of DM/$ in the transaction?
e) What price in dollars can the American company establish by using the forward market in deutsche marks?