Suppose that a U.S. firm imports
Suppose that a U.S. firm imports €1,000,000 of goods from a French firm, and needs to pay the full amount to the French firm in 6 months. Assume that the six-month forward rate is available for this U.S firm at the rates of $1.20/€ Bid and $1.25/€ Ask prices.
a. Describe the forward hedge to cover the €1,000,000 payables. When you answer this question, you must clearly state which currency you sell/buy at what price. Explain why this strategy is called “hedging”.