You are a U.S. exporter concerned about your transaction exposure on a recent sale to an importer in Germany. The invoice, just sent, is for 500,000 euros payable in 60 days, which will be about mid-February. The current exchange rate is $1.00 per euro, and you fear that the dollar will appreciate against the euro due to the rebound in the domestic economy and the improvement in the economy with potentially increasing interest rates. The 60-day forward rate is $.99.
a) What is the value of the invoice in dollars at the current spot rate?
b) If a forward contract is sold, what will be the value of the invoice in dollars at the forward rate?
c) What are the advantages and disadvantages of hedging the transaction with a forward contract?