Possible Outcomes of Forward Market Hedge as of December 31

Possible Outcomes of Forward Market Hedge as of December 31

December 31: GE T-Account (Millions)

Account receivable

€10.00

Forward contract payment

€10.00

Forward contract receipt

$14.79

Without hedging, GE will have a €10 million asset whose value will fluctuate with the exchange rate. The forward contract creates an equal euro liability, offset by an asset worth $14.79 million dollars. The euro asset and liability cancel each other out, and GE is left with a $14.79 million asset.

This example illustrates another point as well: Hedging with forward contracts eliminates the downside risk at the expense of forgoing the upside potential.

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