Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six
months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts
that the spot rate is likely to be $1.10 per euro in six months.
Required:
a. What is the expected gain/loss from a forward hedge?
Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer
in whole dollars not in millions.
b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable?
c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted
today. Would you recommend hedging in this case?
d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging?
a.
b. Would you recommend hedging this euro receivable?
C.
Would you recommend hedging in this case?
d. Would you recommend hedging?
Transcribed Image Text:Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro receivable? C. Would you recommend hedging in this case? d. Would you recommend hedging?
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