| Course | FIN 370 Finance for Business (FIN/370) |
|---|---|
| Week | 5 |
| Paper type | International finance and summary paper |
| Length | about 1,000 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Finance |
| Updated | September 2026 |
Free sample paper for FIN 370 Week 5
Paying for Italian Espresso Machines in Euros: Exchange Rate Exposure, a Forward Hedge Checked Against Interest Rate Parity and a Course-Wide Look at One Importer's Finances
[Student Name]
University of Phoenix
FIN/370: Finance for Business
Week 5 Assignment
[Instructor Name]
[Date]
The importer, its supplier and all figures are composites written for a model paper; methods and research findings come from the sources listed.
A composite company imports commercial espresso machines, grinders and parts from an Italian manufacturer and sells them to cafes, restaurants and hotel chains in the United States, with sales of about $18 million. It pays its supplier in euros on 90-day terms and prices its machines to customers in dollars. It has just placed a large order for the spring season and owes €2 million in 90 days. For an importer, the price of a machine is not settled when the order is placed; it is settled when the euros are bought. This paper analyzes the currency risk and then summarizes the company's finances.
Three Kinds of Exposure
Transaction exposure is the risk that a specific foreign-currency payment will cost more in dollars when paid; the €2 million payable is the clearest example. Translation exposure arises when a company converts a foreign subsidiary's statements into dollars; the importer has no subsidiaries abroad, so it has little. Economic exposure is the longer-run effect of exchange rates on competitiveness: if the euro strengthens for years, Italian machines become more expensive relative to machines from Switzerland or Asia, and the importer's customers may switch.
The Payable Unhedged
The spot rate today is $1.08 per euro, so the payable would cost $2.16 million if paid now. If the euro strengthens to $1.14 in 90 days, it will cost $2.28 million, $120,000 more; if it weakens to $1.02, it will cost $2.04 million. The importer's gross margin on the order is about $500,000, so a strong euro would consume nearly a quarter of it.
A Forward Contract
The importer's bank quotes a 90-day forward rate of $1.085 per euro. A forward contract obligates the importer to buy €2 million in 90 days at that rate, fixing the cost at $2.17 million regardless of the spot rate then. The importer gives up any gain if the euro weakens but removes the risk of loss if it strengthens.
Checking the Forward Against Interest Rate Parity
Interest rate parity says the forward rate should reflect the difference in interest rates between the two currencies. With a 90-day dollar interest rate of 4.3% a year and a euro rate of 2.5%, the parity forward rate is the spot rate times one plus the quarterly dollar rate, divided by one plus the quarterly euro rate: $1.08 times 1.01075 divided by 1.00625, about $1.0848 (Brigham & Houston, 2022). The bank's quote of $1.085 is consistent with parity, so it is fairly priced and is not a forecast that the euro will rise.
A Currency Option
Alternatively, the importer could buy a call option that lets the importer choose whether to buy €2 million at $1.09 in 90 days, for a premium of about 1.6% of the notional, roughly $35,000. If the euro rises above $1.09, the option caps the cost at $2.18 million plus the premium; if it falls, the importer buys at the lower spot rate and loses only the premium. The option costs more up front but keeps the benefit of a weaker euro.
Choosing
Froot et al. (1993) argued that hedging adds value when it protects the cash flow a firm needs to fund its investments without costly outside financing. The importer's margin on the order is thin, and a strong euro could force it to draw on its credit line in its busiest season. The forward is the simpler and cheaper choice for this order. The option makes sense only if management strongly expects the euro to weaken.
Purchasing Power Parity and Pricing
Over longer periods, purchasing power parity suggests that exchange rates move to offset differences in inflation. If inflation in the euro area stays lower than in the United States, the dollar may weaken over time, raising the dollar cost of Italian machines. The importer should review its price list twice a year and build currency movements into its pricing, since a forward hedge protects one order but not future competitiveness (Krugman et al., 2022).
A Summary Analysis Using the Course
Applying earlier tools gives a broader picture. The importer's current ratio is 1.6 and its inventory turnover 3.4, weaker in the spring when inventory builds. Its net profit margin is about 5%, so a $120,000 currency loss would cut a year's profit of about $900,000 by 13%. Its credit line costs 8.5%; the cost of hedging with a forward is effectively the interest rate difference already embedded in the rate, small compared with the risk it removes. Its growth plan requires about $600,000 of added working capital next year, which retained earnings can largely fund if margins hold and the euro does not surge.
Other Ways to Reduce Exposure
Hedging with contracts is not the only tool. The importer could ask its Italian supplier to invoice part of each order in dollars, shifting the risk to the supplier, which may accept for a small price increase. It could hold a euro bank account funded when the euro is weak, a natural hedge for future payments. Or it could add price adjustment clauses to its large hotel contracts so that part of a currency move passes to customers. Each option has a cost, but together they reduce reliance on forwards.
Recommendation
The importer should adopt a policy of hedging at least 75% of euro payables with forwards as soon as orders are confirmed, review prices semiannually for currency changes and consider options for large seasonal orders when volatility is high.
Conclusion
The €2 million payable exposes the importer to swings that could erase a quarter of the order's margin. A forward at $1.085, consistent with interest rate parity, fixes the cost, while an option would cap it at a premium. Combined with the course's ratio and planning tools, the analysis shows a sound but thin-margined business for which a consistent hedging policy protects the cash it needs to grow.
References
Brigham, E. F., & Houston, J. F. (2022). Fundamentals of financial management (16th ed.). Cengage.
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. The Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2022). International economics: Theory and policy (12th ed.). Pearson.
What the FIN 370 Week 5 instructions ask
FIN 370 Week 5 generally asks students to explain international finance concepts and to summarize the course through an integrated analysis. International topics commonly include exchange rates and how they are quoted, transaction, translation and economic exposure, hedging with forwards, futures and options, interest rate parity and purchasing power parity and the risks of doing business abroad. The summary portion may ask students to evaluate one company's financial condition using ratios, time value and risk concepts from earlier weeks. The paper should show calculations clearly, make a recommendation and support it with finance texts and research in APA form, with exchange rates labeled in dollars per euro or the reverse.
How this FIN 370 Week 5 example is built
An importer that pays suppliers in euros but sells in dollars faces currency risk in every order, which makes the international material practical. The paper begins with the three kinds of exposure, using the importer's own business for each. The €2 million payable is then analyzed three ways, with the cost in dollars under different exchange rate outcomes. The forward rate is checked against interest rate parity to show that it reflects interest rate differences rather than a forecast. Purchasing power parity explains longer-run pricing pressure. The summary analysis returns to the course's earlier tools to judge the importer's finances and ends with a recommendation for a hedging policy.
FIN 370 Week 5 grading rubric: where the points go
Faculty generally grade this week on correct identification of exposures, correct hedge calculations, a sound comparison of hedging choices and an integrated summary. Faculty check that dollar costs are computed correctly for each exchange rate outcome, that the forward locks in a known cost while the option sets a ceiling at a premium, that interest rate parity is applied with the correct interest rates and time period and that the summary uses ratios or other tools from the course. A recommendation that fits the company's risk tolerance and margins earns credit. Consistent exchange rate labels and APA references to finance texts and research earn the remaining credit.
FIN 370 Week 5 help: mistakes to avoid
A common FIN 370 Week 5 error is confusing exchange rate quotations, dividing when multiplying is needed. State the quote as dollars per euro and multiply euros by it to get dollars. Another is presenting a forward rate as a forecast; it reflects interest rate differences between currencies. Students also compare a forward and an option without the option's premium. Include it. For the summary, apply at least two tools from earlier weeks of the course, such as ratio analysis and time value, rather than restating definitions. Explain why a small importer might hedge even though hedging has costs, and what it gives up by doing so. Finally, recommend a policy, not just a single trade.
Related FIN 370 sample papers
Other FIN 370 week samples
- FIN 370 Week 1: Financial Management and Analysis
- FIN 370 Week 2: Time Value of Money
- FIN 370 Week 3: Financial Markets and Institutions
- FIN 370 Week 4: Risk, Return and Planning
FIN 370 Week 5 questions, answered
What does FIN 370 Week 5 usually cover?
It usually covers international finance, including exchange rates, currency exposure, hedging and parity conditions, together with a summary analysis that applies tools from the whole course.
Where can I find a free FIN 370 Week 5 sample paper?
The espresso machine importer's currency hedge and summary analysis appear on this page with notes on every calculation, and they are free to read. A first draft on the company in your own assignment is free too.
What is transaction exposure?
The risk that exchange rate changes will alter the home-currency value of a specific foreign-currency payment or receipt already contracted.
How does a forward contract hedge currency risk?
It fixes today the exchange rate for a future exchange of currencies, so the importer knows the dollar cost of its euro payment regardless of later rate changes.
What is interest rate parity?
The condition that the forward exchange rate differs from the spot rate by the difference in interest rates between the two currencies over the same period.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official University of Phoenix document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
Request this one custom, free · All FIN 370 week samples · All courses