A West German company buys industrial machinery from a U.S. company at a price of $10 million The machinery will be delivered and paid for in six months. The German company seeks to establish its cost in deutsche marks. It decides to use the forward market to accomplish its objective. The company contacts its Bonn bank, which provides the quotations listed in Table. The bank states that it will charge a commission of 1% on any transaction.
a) Does the German company enter the forward market to go long or short of forward dollars?
b) What is the number of DM/$? What is the dollar value of the deutsche mark?
c) What is the equilibrium forward rate for the deutsche mark expressed as 8/DM?
d) Does the commission increase or decrease the dollar value of the deutsche mark?
e) What price in deutsche marks can the German company establish by using the forward market in dollars?