A company plans to import goods worth €200,000 in three months. The current spot exchange rate is $\text{₦}550$ per € and the three‑month forward rate is quoted at $\text{₦}560$ per €. The company can either wait and purchase the euros at the spot rate prevailing in three months (the expected spot rate is $\text{₦}570$ per €) or lock in the forward contract.

(a) Calculate the expected cost in naira if the company waits for the spot rate.
(b) Calculate the cost in naira if the company locks in the forward contract.
(c) Which alternative is financially preferable based on the expected spot rate?
(d) If the actual spot rate in three months turns out to be $\text{₦}570$ per €, determine the gain or loss on the forward contract.

Question

A company plans to import goods worth €200,000 in three months. The current spot exchange rate is $\text{₦}550$ per € and the three‑month forward rate is quoted at $\text{₦}560$ per €. The company can either wait and purchase the euros at the spot rate prevailing in three months (the expected spot rate is $\text{₦}570$ per €) or lock in the forward contract.

(a) Calculate the expected cost in naira if the company waits for the spot rate.
(b) Calculate the cost in naira if the company locks in the forward contract.
(c) Which alternative is financially preferable based on the expected spot rate?
(d) If the actual spot rate in three months turns out to be $\text{₦}570$ per €, determine the gain or loss on the forward contract.

Accepted Answer

Wait cost = 114000000; Forward cost = 112000000; Prefer forward; Forward gain = 2000000

Gce Model Questions Vol1 2025 Commerce Question 4

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