Classic City Exporters Finance: Hedge risk with forward contract
Classic City Exporters (CCE) recently sold a large shipment of sporting equipment to a Swiss company and the goods will be sold in Zurich. The sale was denominated in Swiss francs (SF) and was worth SF500,000. Delivery of the sporting goods and payment by the Swiss buyer are due to occur in six months. The current spot exchange rate is $0.6002/SF (SF1.6661/$), and the six-month forward rate is $0.6020/SF (SF1.6611/$).
What risk would CCE run if it remained unhedged, and how could it hedge that risk with a forward contract? Assuming that the actual exchange rate in six months is $0.5500/SF (SF1.8182/$), compute the profit or loss and state which it would CCE experience if it had chosen to remain unhedged.