Selling and Buying Currencies Forward

Abstract

Assuming now that a UK exporter has gone to the USA and has sold a product to the value of £10,000 and has converted that £10,000 into dollars at a rate of exchange of $1.5400 = £1. That means that he has now an order for $15,400 which he expects to receive say in about one month or three months time. If he had the dollars today and converted them back into sterling at $1.5400 he would have £10,000. But of course he is not going to receive the dollars today, he is going to receive them in say either one month or three months time. What then will be the value of those dollars in sterling terms when he receives them in one month or three months time? Here you have the problem. He has got an order but of course he has no knowledge at all of what that order will be worth in sterling terms when he receives the dollars.