Unformatted text preview: becomes zero. In this case the Boss Corporation has liability exposure (from the import purchase). Here is the basic problem: • Accounts payable denominated in a foreign currency. • Problem – uncertainty surrounding the U.S. dollars needed to buy the foreign currency to settle the obligation. • Solution – enter into a forward contract today (at the spot rate) to buy the foreign currency needed to settle the obligation. • The hedge creates an asset denominated in the foreign currency; which offsets the liability denominated in the foreign currency. Regardless of what happens to the exchange rate between the U.S. dollar and the foreign currency, the corporation has no foreign currency exposure. The will win on ½ of the transaction & loose on the other ½. The exchange rate gain and losses will cancel each other out....
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- Fall '08
- United States dollar, boss corporation