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FIU/BPMEZ International Finance

EXAMPLE SERIES NO. 3
FORWARD FOREIGN EXCHANGE TRANSACTIONS
1. Calculate the forward rates for all maturities, knowing the current spot rate and swap
rate quotes. Also calculate the percentage annualized premium or discount of the USD.
CZK/USD
14d
2m 19 25

22.240
10

22.259
12

JPY/USD
1m
3m 138 129

117.940117 .952
122 117

2. Mlékárna Kunín, a.s. exported milk rice to Sweden for 2.3 million CZK. SEK. Payment for
the export will be received in 30 days. The current spot rate of CZK/SEK is 2,932-2,947.
The company's financial manager is concerned about the depreciation of the SEK against
the CZK and therefore enters into a forward transaction. The current 1m swap rate is 32 27. Plot the evolution of the unhedged export income in CZK over the exchange rate
range 2.8 to 3.0 CZK/SEK and the evolution of the export income hedged by the forward.
Define in which range of exchange rates does the forward bring Kunín Dairy a profit
compared to the unhedged position and in which range a loss.

3. A foundry in Slovakia imports aluminium from Ukraine. The total delivery price that the
importer has to pay to the Ukrainian producer is CZK 3 million. USD and the maturity is 60
days. As a result of concerns about the appreciation of the USD, the Slovak foundry
decides to fix the total Euro cost of the import using a forward trade and not to speculate
on the appreciation of the USD. The relevant two-month forward exchange rate is 1.224
USD/EUR. Define over what range of exchange rates the forward makes a gain relative to
the unhedged position and over what range it makes a loss.

4. Budějovický Budvar, n.p. exported 1000 hl. of its lager to Germany. The price of the beer
was EUR 80 000. Payment for the export will be received in 30 days. The current spot
exchange rate CZK/EUR is 26,32 - 26,47. The company's financial manager is concerned
about the depreciation of the EUR against the CZK and therefore enters into a forward
trade. The current 1m swap rate is 32 - 27. Plot the evolution of the unhedged export
income in CZK over the exchange rate range 25 - 27 CZK/EUR and the evolution of the
export income hedged by the forward. Define in which range of exchange rates

this

FIU/BPMEZ International Finance

Budějovický Budvar makes a profit on the forward position compared to the unhedged
position and in which range it makes a loss.