Mr. Peters has to consider an option with less risk to achieve profitability. Therefore, the forward exchange market is the better option of the two due to its stability. However, gains are only guaranteed provided all factors remain the same throughout the exchange process. The spot exchange rate might be the best option if he requires money on the spot. However, Mr. Peters is looking for an option that will prove its profitability in three months and possibly acquire a contract.
Mr. Peters needs to speculate on both markets and expected dollars likely to be made in each case. Accepting the current spot exchange rate will cost him an invoice of €465,184, which is quite profitable. However, this method of exchange is risky due to its volatile nature, which directly affects the client’s investments. A change in the spot exchange rate will lead to an invoice of €363,136 at a rate of €1.1348. On the other hand, banks provide their top clients the option of locking in their currency using the forward exchange rates for a certain amount of time (Eun et al., 2021). This enables the clients enough time to make informed decisions on their currency. Mr. Peters is likely to make a profit of €2,217 if he opts for the hedged exchange rate.
The client has to consider the time he had in mind to gain from the exchange rates. The current spot is the best way if he needs his profits soon to venture into something else. However, he is not assured of profitability due to the fluctuation in exchange rates. Therefore, he should be quick to make his investment and withdraw profits if he chooses the current spot. Forward exchange rates are the safer option for reducing risks and will guarantee him profits by the end of the designated three months.
Reference
Eun, C. S., Resnick, B. G., & Chuluun, T. (2021). International financial management (9th edition), p.140. Web.