Weyerhauser is a U.S based forest products firm. In June Weyerhauser delivers a shipment of raw lumber to Japan. The y55,000,000 receivables is due 180 days. The firm's foreign exchange advisors believe the yen will be at about y115/$ then, Current spot rate is y110/$ Weyerhauser has received 180 day forward quote of y108/$. If the company does nothing and the exchange rate goes to y115 as expected. How much will the firm receive in dollars in 180 days? Is this cash flow risky or known with certainly today?

When selling product overseas, it is suggested that forward contract or option is bought to prevent foreign exchange rate risk. Forward contract is a type of contract that the company can make with the bank to buy or sell foreign currency. However, it is fixed and cannot be canceled. In the case, as Weyerhauser is selling lumber to Japan and will receive Japanese yen from the customer, the firm can make forward contract to sell Japanese yen to the bank at y108/$. If they decide to make forward contract with the bank, then in the next 180 days, the firm will receive $509,259.26 (y55,000,000/108).

On the contrary, if the firm does nothing and the exchange rate goes to y115/$, then they will receive only $478,261 (y55,000,000/115).

From the above, we can see that the firm will receive more dollars if it decides to make the forward contract with the bank. However, if the spot rate after 180 days is y107/$ or less, the firm will also lose the opportunity to earn more dollars as they have to follow the forward contract. Thus, receiving cash flow in foreign currency is risky because the exchange rate always change and is unpredictable.