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Question 3a

PZK Co, whose home currency is the dollar, trades regularly with customers in a number of different countries. The company expects to receive €1,200,000 in six months’ time from a foreign customer. Current exchange rates in the home country of PZK Co are as follows:
Spot exchange rate: 4·1780–4·2080 euros per $
Six-month forward exchange rate: 4·2302–4·2606 euros per $
Twelve-month forward exchange rate: 4·2825–4·3132 euros per $

Required:
(a) Calculate the loss or gain compared to its current dollar value which PZK Co will incur by taking out a forward exchange contract on the future euro receipt, and explain why taking out a forward exchange contract may be preferred by PZK Co to not hedging the future euro receipt. (4 marks)

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