Forward Contract for Income
Forward Contract or agreement can also be set for
to hedge the risk associated with income receipt; the following example
explains hedging process for income receipt.
Example
UK
Company expected to receive payment $ 150,000, payment would be received in
three month time, three month forward rate are USD/Pound is 1.50000-1.6000;
Hedge the risk using forward agreements?
Solution
1. Set
Agreement
An agreement would be entered into using the
forward rate to hedge the risk associated with the receipt of income i.e.
calculate certain amount of receipt.
2. Rate for
Hedging
It is important note that it is an income,
therefore the rate will be apply to receive less income or lower income i.e.
1.6000
3. Calculate
Liability
Agreement was set at rate of
1.6000, now this rate can be used to calculate the expected income in pounds.
150,000/1.6000
= 93,750
(Pound)
