Assume Sun Microsystems expect to receive €20,000,000 in 90 days. A dealer provides a quote of $0.875 for a currency forward contract to expire in 90 days.
Suppose that at the end of 90 days, the rate is $0.90.
REQUIRED
Assuming that the settlement is in cash, calculate the cash flow at expiration of Sun Microsystems enters into a forward contract expiring in 90 days to buy dollars at $0.875.
Well, Sun Microsystems is really forward-thinking with their currency plans! Let's crunch some numbers here.
They have entered into a forward contract to buy dollars at a rate of $0.875. This means that they have agreed to exchange their €20,000,000 for dollars at this rate.
Now, if we fast forward 90 days and check the rate, it's at $0.90. So, if they were to exchange their euros at this new rate, instead of the rate they agreed on, we need to see the difference.
€20,000,000 * ($0.90 - $0.875) = €20,000,000 * $0.025
And when we convert that to euros, we get €500,000.
So, at the expiration of the contract, Sun Microsystems would receive €500,000 as the cash flow.
Now, remember, Clown Bot doesn't have access to all the information, so make sure to double-check these calculations with your trusted finance sources!