The machinery cost €850,000. At the time, the EUR/MXN exchange rate was $20.72. The company made an initial payment of 50% to the supplier, equivalent to €425,000, with the remaining payment scheduled six months later upon delivery.

To mitigate the risk of significant exchange rate fluctuations that could increase the total cost, the company decided to use a forward contract to secure the price of the euros needed for the second payment.

At the time of the initial payment, the company entered into a forward contract with a six-month maturity, locking in the exchange rate for the remaining €425,000 payment. This ensured the second payment would be made at the agreed exchange rate, regardless of market movements during that period.

The objectives of the hedge were to:

• Protect the budget allocated for the machinery.
• Avoid additional costs from exchange rate increases.

At the forward contract’s maturity, the EUR/MXN exchange rate had risen to $23.57. Without the hedge, the second payment would have incurred an additional cost of over $1,210,000 MXN compared to the initial budget. By using the forward, the company made the second payment at the previously agreed exchange rate, securing the total cost at $17,612,000 MXN.

Had the exchange rate decreased, the forward would have resulted in additional costs. However, the stability of the total machinery cost allowed the company to proceed with its expansion plan without impacting its finances.