A ________, which is between a bank and a customer (or another bank), specifies delivery at a fixed future date, of a fixed amount of one currency against dollar payment.
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A. B. C. D. E.B
A U.S. firm buys goods from Germany with payment of DM 500,000 due in 90 days. The current price of the DM is $0.4490, yet may rise against the dollar which increases the dollar cost of the goods. The U.S. firm can protect itself against this exchange risk by entering into a 90-day forward contract with a bank at a price of $0.4511. Thus, according to the forward contract, the bank will give the U.S. firm DM 500,000 in 90 days to pay for the goods and the U.S. firm will give the bank $225,550 million (DM 500,000 x 0.4511). If the spot rate in 90 days is less than $0.4511, the U.S. firm will experience a loss on the forward contract because it is buying marks for more than the current rate. On the other hand, if the spot rate is higher than $0.4511, the importer will implicitly profit.