General Electric sold jet engines on credit to British Overseas Airways Corp (BOAC) and has invoiced BOAC for GBP 10 million to be payable to G.E. in six months. Currently, the six-month forward exchange rate is $1.4450 per GBP and the foreign exchange advisor for General Electric predicts that the spot rate is likely to be $1.4200 in six months.
1. Assume G.E. enters into a forward contract today to sell the euros forward in 6 months at $1.4450. What is the expected gain/loss from the forward hedging if the spot rate in 6 months is the predicted value of $1.4200?
2. If you were the financial manager of G.E., would you recommend hedging this euro receivable? Why or why not?
3. Suppose the foreign exchange advisor predicts that the future spot rate in six months will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?