Your U.S. based MNC has a factory in Brazil. You will need to purchase an intermediate part on June 1st in Brazil, at a cost of 1 million Brazilian Real. The exchange rate in the spot market is $1 to 4.8 Real. The exchange rate in the futures market is currently 1 Real to $0.19 for December delivery, and the exchange rate in December turns out to be 1 Real to $0.175. If you hedge the full 1 million Real in the currency futures market, how much is your gain or loss in December (you will convert your Real back to dollars then)? O Gain of $15,000 O Loss of $33,333 O Loss of $18,333 O Gain of $19,000
Your U.S. based MNC has a factory in Brazil. You will need to purchase an intermediate part on June 1st in Brazil, at a cost of 1 million Brazilian Real. The exchange rate in the spot market is $1 to 4.8 Real. The exchange rate in the futures market is currently 1 Real to $0.19 for December delivery, and the exchange rate in December turns out to be 1 Real to $0.175. If you hedge the full 1 million Real in the currency futures market, how much is your gain or loss in December (you will convert your Real back to dollars then)? O Gain of $15,000 O Loss of $33,333 O Loss of $18,333 O Gain of $19,000
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Your U.S. based MNC has a factory in Brazil. You will need to purchase an intermediate part on
June 1st in Brazil, at a cost of 1 million Brazilian Real.
The exchange rate in the spot market is $1 to 4.8 Real. The exchange rate in the futures market
is currently 1 Real to $0.19 for December delivery, and the exchange rate in December turns out
to be 1 Real to $0.175.
If you hedge the full 1 million Real in the currency futures market, how much is your gain or loss
in December (you will convert your Real back to dollars then)?
O Gain of $15,000
O Loss of $33,333
O Loss of $18,333
O Gain of $19,000
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