GAMESA is a Spanish company specialized in sustainable energy technologies , mainly wind power . GAMESA is positioned among the most important wind generator manufacturers in the world. On January 1 2010 GAMESA US has reached an agreement with SIEMENS to sell 10 generators for a total of €26 Million. Obviously this operation has a translation risk that GAMESA US wants to hedge assuming a short position in a Forward contract at one year maturity. Assume exchange rate on January 2010 is 1$/€. a) Which is the delivery price agreed in the Forward contract?

1 € = 0.95 $ = F

Explanation:

The computation of the delivery price agreed in the Forward contract is shown below:

As we know that

Delivery price is the price at which the Gain or (Loss) on forward contract is zero

Spot exchange rateValue of receivableGain / (Loss) on forward contractTotal Cash flows

S                    R = S × 26                                                              (26 × 0.95)

1.00                      26.00                                          (1.30)                 24.70

0.95              24.70                                             -                          24.70

1.50              39.00                                           (14.30)               24.70

0.91                      23.66                                            1.04               24.70

0.87              22.62                                            2.08                24.70

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