Trader Joe's (TJ) has ordered 10 crates of Trappist Westvleteren 6, from Belgium, which will be delivered in 30 days. On delivery, TJ must pay the monks €17.50 per bottle of beer. TJ knows it can sell each bottle for $20 in its U.S. stores.
(a) At the current exchange rate of 1 euro per U.S. dollar, what would be the $ profit or loss per bottle for TJ?
(b) If the euro appreciated to €0.95/$ over the 30-day delivery period, what would be TJ's $ profit or loss per bottle?
(c) To reduce its exchange rate risk, TJ has the opportunity to purchase a forward contract from Chase Bank. Assuming no transactions fees, what forward rate ($/€) would guarantee that TJ breaks even on its beer buy?
(d) If TJ wanted to ensure a profit of $0.50 per bottle, what forward rate ($/€) would guarantee it?