How to Maximize Your Profit from Foreign Exchange Transactions

Question 5:

In scenario A (exchange rate will be 0.7975 USD per AUD) and strategy (b) (forward hedge), what are your USD proceeds?

Question 6:

In scenario B (exchange rate will be 0.6525 USD per AUD) and strategy (b) (forward hedge), what are your USD proceeds?

Answer:

In scenario A and using forward hedge your USD proceeds would be approximately 1.442 million USD.

In scenario B and using strategy (b) (forward hedge), your USD proceeds would be approximately 1.442 million USD.

Foreign exchange transactions can be complex, especially when dealing with different currencies and exchange rate fluctuations. To maximize profits from such transactions, it's essential to choose the right strategy based on market conditions and forecasts.

In scenario A, where the exchange rate will be 0.7975 USD per AUD, and using strategy (b) which is a forward hedge, the USD proceeds can be calculated as follows:

Step 1: Calculate the AUD proceeds using the forward rate.

2M AUD * 0.7975 USD per AUD = 1.595M USD

Step 2: Calculate the profit or loss from the forward hedge.

Forward rate - Spot rate = 0.721 USD per AUD - 0.7975 USD per AUD = -0.0765 USD per AUD

Loss on forward hedge = 2M AUD * -0.0765 USD per AUD = -153K USD

Step 3: Calculate the net USD proceeds.

AUD proceeds - Loss on forward hedge = 1.595M USD - 153K USD = 1.442M USD

Therefore, in scenario A and using strategy (b) (forward hedge), your USD proceeds would be approximately 1.442 million USD.

In scenario B, where the exchange rate will be 0.6525 USD per AUD, and using strategy (b) (forward hedge), the USD proceeds can be calculated in a similar manner:

Step 1: Calculate the AUD proceeds using the forward rate.

2M AUD * 0.6525 USD per AUD = 1.305M USD

Step 2: Calculate the profit or loss from the forward hedge.

Forward rate - Spot rate = 0.721 USD per AUD - 0.6525 USD per AUD = 0.0685 USD per AUD

Profit on forward hedge = 2M AUD * 0.0685 USD per AUD = 137K USD

Step 3: Calculate the net USD proceeds.

AUD proceeds + Profit on forward hedge = 1.305M USD + 137K USD = 1.442M USD

Therefore, in scenario B and using strategy (b) (forward hedge), your USD proceeds would be approximately 1.442 million USD.