It is June 2020. As the Treasurer of a UK exporter, ABC PLC, your target market is the United States. You are concerned about an appreciation in Sterling against the US Dollar, as this could potentially wipe out the profit margin of your company. Use an FX forward hedging strategy for the UK company according to a contract to supply $10 million worth of goods in 6 months to the United States. The market rates of today is: Spot £/$ 1.35 6 months $ deposit rates 1.00% 6 months £ deposit rates 0.80% Day count is 180 days from spot to receipt of dollar receivables. UK interest convention on a 365-day year, US on a 360-day year.

Calculate the outright forward FX rate and the sterling amount agreed when the $10 million is received. What are the advantages and disadvantages to the Treasurer of ABC PLC of using this type of derivative to hedge their risk?

Answer rating: 100% (QA)

The outright forward FX rate is 1 34 86 and the sterling amount agreed when the 10 mil... View the full answer