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.