Monty Co, whose domestic currency is the dollar ($), exports to countries whose currency is in Pesos. In 6 months’, time they are expecting a 150,000 peso receipt from a customer.

Monty Co has a supplier in a foreign country whose currency is the dinar (D). In six months’, time, Wren Co must make a payment to the supplier, of D1 million.

Monty Co also wants to compare making a lead payment of D1 million now, with taking out a forward exchange contract for D1 million, that can be exercised in six months’ time. As the company is short of cash, it would need to borrow money for any exchange rate risk hedging.

Exchange Rates Peso to $ Dinars to $

Spot rate 5.78 2.05

Six month forward 5.90 1.98

The following information on current short-term interest rates is available:

              Six-month Interest rates         Borrowing Deposit

Dollars          2%                                               1%

Pesos             5%                                                 4%

As a result of the general uncertainty over exchange rates, Monty Co is considering a variety of ways in which to manage its foreign exchange rate risk, including the use of derivatives.

Which TWO of the following derivative instruments are characterized by a standard contract size?

Forward contract

Forward rate agreement

Futures contract

Swap

Over-the-counter option

Exchange tradable option

Answer rating: 100% (QA)

The two derivative instruments that are characterized by a standard contract size are 1 Forward contract A forward contract is a financial contract th... View the full answer