Chapter 01 · Section 1.1

Case Study - A Swiss Importer

Assume you are a Swiss importer of German cars. It is May 1 and your next delivery is expected on July 15, for which you will have to pay 500,000 Deutsche Marks on delivery.

In order to avoid any foreign exchange risk you can:

a) buy DM 500,000 now, May 1;
• b) buy DM 500,000 in July;
  No. With this solution, you are exposing yourself to the fluctuations of the exchange rate. You would have to accept the prevailing exchange rate in July, and the possibility of a substantial loss (or gain).
  c) buy DM 500,000 forward for July 15 delivery.

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