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TFI Hedge Example based on Forward Hedging
Example
1.
A Business sells Computers in Europe.
2.
The Computers are imported from China and invoiced in USD.
3.
The Company just ordered 100 computers, invoiced at $140,000, payable in two months time.
4.
The EUR/USD forward rate today is 1.06.
5.
Each Computer is sold at €1,400.
6.
In this example the client expects an income of €140,000 and has an expense of $140,000.
EUR / USD
in two months time
The following comparison below shows the profit margin of the client between (i) the client assuming the foreign exchange risk and (ii) hedging with a two month €100,000 forward contract under different EUR/USD exchange rates.
1.10
Invoice
$140,000
Euro Equivalent
€127,273
FX Risk
— Not Hedged —
Cost per Unit
€1,272
Profit per Unit
€128
Profit Margin
10%
FX Risk
— Hedged —
Forward Rate
1.06
Cost per Unit
€1,320
Profit per Unit
€80
Profit Margin
6%
1.05
Invoice
$140,000
Euro Equivalent
€133,333
FX Risk
— Not Hedged —
Cost per Unit
€1,333
Profit per Unit
€67
Profit Margin
5%
FX Risk
— Hedged —
Forward Rate
1.06
Cost per Unit
€1,320
Profit per Unit
€80
Profit Margin
6%
1.00
Invoice
$140,000
Euro Equivalent
€140,000
FX Risk
— Not Hedged —
Cost per Unit
€1,400
Profit per Unit
€0
Profit Margin
0%
FX Risk
— Hedged —
Forward Rate
1.06
Cost per Unit
€1,320
Profit per Unit
€80
Profit Margin
6%
— Without Hedge
Vs
Hedged
shows the effects of the fluctuation of the rate that will have on the profit margin, in two months time.
— Hedged
shows that Hedging removes currency risk.
Risk Warning:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
45% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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