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;
• c) buy DM 500,000 forward for July 15 delivery.
  Yes. Since you prefer to avoid foreign exchange risk, you would buy a forward contract for delivery in July. In July you will buy from your bank DM 500,000 at a specified rate - the Forward Price on May 1 for July 15 delivery. Continue

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