Bridge Works Engineering Plc. needs to import Steel from the United States. It is considering alternative...
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Bridge Works Engineering Plc. needs to import Steel from the United States. It is considering alternative mechanisms of securing the value which it will pay to acquire the steel. BWE Plc. is a UK based reporting firm and therefore its Reporting Currency is Sterling ('s). As an engineering firm the runs a large amount of working capital which is currently financed via an overdraft facility. The firm is investigating several options for the purchase of the steel as of December 2019. The firm needs to buy 400 metric ton of Steel and this is currently priced at $12,100 per ton. The credit terms from the supplier is 6 months from the receipt of the invoice, which can be sent electronically the date the order is placed. The firm uses the Steel in the production of the projects it is involved with. The firm will use Steel within the annual accounting period which it is received in the UK. Current Exchange Rates: Current Interest Rates Sterling / US Dollar Sterling US Dollar 0.96% 1.00 / $1.3250 (Per Annum) (Per Annum) 1.94% The firm is considering two alternatives of managing the Foreign Exchange Risk. One is an FX futures contract and the other is a forward contract. Details of which are below: Forward Contract: CME Futures Contract: Forward Rate: Transaction costs: Forward Rate: Standard Terms: Margins: $1.3314 0.5% of (Sterling) contract value payable on start $1.3248 62,500 15% initial Margin + Variation Margin The Futures contract is provided by the central exchange and has a clearing house which deals with the margin transactions. The Forward Rate is provided by BWE'S own bank and has one-off transactions costs which are effectively, arrangement fees. Assume that in June 2020 (+ 6 months) the actual exchange rate between Sterling and the US Dollar is $1.2240, and the CME rate in June 2020 is also $1.2240. Required: a) Calculate the eventual cost per tons of Steel in Sterling under each method of risk management for the Foreign Exchange Risk. (The forward rate transaction - 6 Marks. Futures Contract transaction - 10 Marks) (16 Marks) b) Given the actual exchange rates in 6 months (Spot) calculate the difference between the risk managed costs [lowest] of the steel and the actual costs should the position be left 'un-hedged'. (2 Marks) c) Critically evaluate the use of either of these contracts with respect to this firm. What would be the advantages of either choice, compared to the disadvantages. (7 Marks) Bridge Works Engineering Plc. needs to import Steel from the United States. It is considering alternative mechanisms of securing the value which it will pay to acquire the steel. BWE Plc. is a UK based reporting firm and therefore its Reporting Currency is Sterling ('s). As an engineering firm the runs a large amount of working capital which is currently financed via an overdraft facility. The firm is investigating several options for the purchase of the steel as of December 2019. The firm needs to buy 400 metric ton of Steel and this is currently priced at $12,100 per ton. The credit terms from the supplier is 6 months from the receipt of the invoice, which can be sent electronically the date the order is placed. The firm uses the Steel in the production of the projects it is involved with. The firm will use Steel within the annual accounting period which it is received in the UK. Current Exchange Rates: Current Interest Rates Sterling / US Dollar Sterling US Dollar 0.96% 1.00 / $1.3250 (Per Annum) (Per Annum) 1.94% The firm is considering two alternatives of managing the Foreign Exchange Risk. One is an FX futures contract and the other is a forward contract. Details of which are below: Forward Contract: CME Futures Contract: Forward Rate: Transaction costs: Forward Rate: Standard Terms: Margins: $1.3314 0.5% of (Sterling) contract value payable on start $1.3248 62,500 15% initial Margin + Variation Margin The Futures contract is provided by the central exchange and has a clearing house which deals with the margin transactions. The Forward Rate is provided by BWE'S own bank and has one-off transactions costs which are effectively, arrangement fees. Assume that in June 2020 (+ 6 months) the actual exchange rate between Sterling and the US Dollar is $1.2240, and the CME rate in June 2020 is also $1.2240. Required: a) Calculate the eventual cost per tons of Steel in Sterling under each method of risk management for the Foreign Exchange Risk. (The forward rate transaction - 6 Marks. Futures Contract transaction - 10 Marks) (16 Marks) b) Given the actual exchange rates in 6 months (Spot) calculate the difference between the risk managed costs [lowest] of the steel and the actual costs should the position be left 'un-hedged'. (2 Marks) c) Critically evaluate the use of either of these contracts with respect to this firm. What would be the advantages of either choice, compared to the disadvantages. (7 Marks)
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Related Book For
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr
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