Alpha International Ltd, a UK company, needs to pay $9,966,250 to an US company in 12...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Alpha International Ltd, a UK company, needs to pay $9,966,250 to an US company in 12 months' time. Market Data at 1st Jan 2020: Exchange rates: Spot GBP/USD $1.3200/E 12-month Forward GBP/USD 1.3600 Currency futures: CME £62,500 Jan 2021 Contract (cash-settled): $1.3400/£ The company is evaluating the following three hedging strategies: 1) The payment is hedged using a future contract 2) The payment is hedged by using Money Market Hedging 3) The payment is not hedged. The future spot exchange rate is expected to move to either of the following rates: i. GBP/USD 1.3544 ii. GBP/USD 1.2322 The interest rates UK 1% per annum US 4% per annum Please evaluate the performance of the three alternative hedging methods in 12 months' time given the two future spot rates scenarios expected by the company, and answer the following questions: (Keep 2 decimals for money amount, 4 decimals for exchange rates) a) In both scenarios, if Alpha Int'l Ltd uses futures contracts, explain the following: How many contracts the company must buy/sell? [4 marks] Does the company need to sell or buy the £ futures contract? Explain. What is the gain/loss in number of ticks if the company hedges with futures contracts? How much is the gain/loss translated into £? [5 marks] What is the total payable amount for the company after hedging with futures contracts? Briefly explain your results. [5 marks] [total a) 18 marks] b) In both scenarios, if the company's financial manager is also considering a money market hedge, explain the following: Explain and calculate how Alpha Int'l would use a money market hedge based on the above market data. N Calculate the effective exchange rate for Alpha Int'l in 12 months' time if the company uses a money market hedge strategy. Briefly explain when the firm should apply the MMH strategy or using Forward. Calculations are required to complete your explanation. Alpha International Ltd, a UK company, needs to pay $9,966,250 to an US company in 12 months' time. Market Data at 1st Jan 2020: Exchange rates: Spot GBP/USD $1.3200/E 12-month Forward GBP/USD 1.3600 Currency futures: CME £62,500 Jan 2021 Contract (cash-settled): $1.3400/£ The company is evaluating the following three hedging strategies: 1) The payment is hedged using a future contract 2) The payment is hedged by using Money Market Hedging 3) The payment is not hedged. The future spot exchange rate is expected to move to either of the following rates: i. GBP/USD 1.3544 ii. GBP/USD 1.2322 The interest rates UK 1% per annum US 4% per annum Please evaluate the performance of the three alternative hedging methods in 12 months' time given the two future spot rates scenarios expected by the company, and answer the following questions: (Keep 2 decimals for money amount, 4 decimals for exchange rates) a) In both scenarios, if Alpha Int'l Ltd uses futures contracts, explain the following: How many contracts the company must buy/sell? [4 marks] Does the company need to sell or buy the £ futures contract? Explain. What is the gain/loss in number of ticks if the company hedges with futures contracts? How much is the gain/loss translated into £? [5 marks] What is the total payable amount for the company after hedging with futures contracts? Briefly explain your results. [5 marks] [total a) 18 marks] b) In both scenarios, if the company's financial manager is also considering a money market hedge, explain the following: Explain and calculate how Alpha Int'l would use a money market hedge based on the above market data. N Calculate the effective exchange rate for Alpha Int'l in 12 months' time if the company uses a money market hedge strategy. Briefly explain when the firm should apply the MMH strategy or using Forward. Calculations are required to complete your explanation.
Expert Answer:
Answer rating: 100% (QA)
The question appears to have multiple parts to it regarding the hedging alternatives Alpha International Ltd a UK company can use to hedge a payment of 9966250 to a US company in 12 months time The co... View the full answer
Related Book For
Corporate Finance and Investment decisions and strategies
ISBN: 978-1292064062
8th edition
Authors: Richard Pike, Bill Neale, Philip Linsley
Posted Date:
Students also viewed these finance questions
-
Question 1: Barni Ltd a UK company that sells various items falling under Standard Rated, Zero-rated, and Exempt goods in UK and exports overseas. Also, Barni Ltd purchases various items falling...
-
An insurance company needs to pay 10 million in years 2 and 3 from now. The term structure is flat at r=2%. The companys assets are held in cash and the companys net worth is zero. The company wants...
-
Evaluating Hedging With Futures Contracts A large farming company likes to firm up prices for its agricultural products. It anticipates harvesting and selling 1,000,000 bushels of a particular...
-
Maria owns and runs her own online premium clothing business (sole trader) named "Maria's Clothing Solutions (MS). Her main competitor is "Brenda's Extraordinary Clothing (BC). She is interested in...
-
Olivia Dietz is studying for the next accounting midterm examination. What should Olivia know about (a) Departing from the cost basis of accounting for inventories and (b) The meaning of market in...
-
Based on your answers to 3.13.1 and 3.13.2, does (A + B) + C = A + (B + C)? Operations performed on fixed-point integers behave the way one expectsthe commutative, associative, and distributive laws...
-
The financial statements for the Columbia Sportswear Company can be found in Appendix A at the end of this book. Required Answer the following questions: a. How much did Columbia Sportswear's cash...
-
How far should an evaluation team go in trying to quantify project contributions to the firms mission or goals? What is the role of financial selection criteria in HPs project selection process?
-
If a fund charges an expense ratio of 1% in 2020 Question 7 options: Your investments in the fund will be reduced by 1% in 2020 Your returns will be reduced by 1% in 2020 You will pay a sales charge...
-
Go Times Inc. has current sales of $7,500 (in millions), an operating ratio of 6%, a capital requirement ratio of 40%, a tax rate of 40% and a corporate cost of capital of 8%. Under new management...
-
Solve t/me sin 2x - dx. cos 2x 0
-
Describe a historical situation where a failure to assess and correctly interpret the external environment resulted in a business failure. What elements of the external environment were missed? How...
-
make mini-article from a brand marketing perspective about how the modern 2023 consumer is currently interested in 1. exploring/open sexuality and 2. finding their truth + new age spirituality. Try...
-
Last year, Dixon Company produced 11,000 units and sold 9,000 units. The company had no beginning inventory Dixon incurred the following costs: Direct materials per unit Direct labor per unit...
-
If a 15 cm diameter cast iron ball has a mass of 6.25 kg; then what diameter must a similar ball need in order to have a mass of 4.15 kg. Give your answer rounded to 3 significant digits.
-
Is the current organization of the United States system of Justice suited to produce "fair" outcomes? If so, what components are crucial to ensuring impartiality, justice for all? If not, identify...
-
The code above is in C++. I had trouble figuring out where all the errors are, but any help would be greatly appreciated. Problem 2: Finding Errors [20 points] Each of the 2 codes below contain at...
-
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the...
-
Argon Mining plc is investigating the possibility of purchasing an open-cast coal mine in South Wales at a cost of 2.5 million which the British government is selling as part of its privatisation...
-
The gross yield to redemption on government stocks (gilts) are as follows: Treasury 8.5% 2000 .......................... 7.00% Exchequer 10.5% 2005 ....................... 6.70% Treasury 8% 2015...
-
Collingham plc produces electronic measuring instruments for medical research. It has recorded strong and consistent growth during the past 10 years since its present team of managers bought it out...
-
When preparing interim financial statements, why is it that the balance sheet accounts are not restated to correspond to the time period being covered?
-
Is the cost of merchandise acquired during the period classified as an asset or an expense? Explain.
-
Assume that a company has in its inventory units of a particular product that were purchased at several different perunit costs. When some of these units are sold, explain how the cost of goods sold...
Study smarter with the SolutionInn App