Suppose a U.S. company contracted to sell 100,000 units of a product to a French company at a unit sales price of €20 with delivery in 90 days and payment due on delivery. The nominal exchange rate between U.S. dollar and Euro is 1.1 $/€ on the contract signing date. The U.S. company has the option of using a 90-day forward contract to protect itself against an adverse change in the exchange rate. Based on the assessment of the financial markets, the 90-day forward contract can be purchased at a discount of 2%.
- If the nominal exchange rate between U.S. dollar and Euro decreases to 1.06 $/€ on the delivery date, how much will the U.S. company receive in terms of U.S. dollar on the delivery date?
- If the U.S. company chooses to use the 90-day forward contact to protect against the foreign exchange risk, how much will the U.S. company receive in terms of U.S. dollar on the delivery date?