1. Company XYZ is a UK based company that selling goods in several EU countries. It...
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1. Company XYZ is a UK based company that selling goods in several EU countries. It is expecting the receipt of €800,000 from a German company in 6 months' time from now. The following information is available: The spot rate is: €1.16 per £1 The 6-month forward rate is: €1.27 per £1 Deposit rate 4% p.a. 2% p.a. Using the information above respond to the following: (i) (ii) (iii) Euros Pounds Borrow rate 7% p.a. 5% p.a. Evaluate what exchange rate risk is and discuss how Company XYZ may be exposed to it. How can Company XYZ use forward contracts to hedge against exchange rate risk? (5 marks) Evaluate what a money market hedge is and how Company XYZ would benefit from it. (5 marks) Critically appraise which of the above strategies would be suitable for Company XYZ (20 marks) [Total: 30 marks] 1. Company XYZ is a UK based company that selling goods in several EU countries. It is expecting the receipt of €800,000 from a German company in 6 months' time from now. The following information is available: The spot rate is: €1.16 per £1 The 6-month forward rate is: €1.27 per £1 Deposit rate 4% p.a. 2% p.a. Using the information above respond to the following: (i) (ii) (iii) Euros Pounds Borrow rate 7% p.a. 5% p.a. Evaluate what exchange rate risk is and discuss how Company XYZ may be exposed to it. How can Company XYZ use forward contracts to hedge against exchange rate risk? (5 marks) Evaluate what a money market hedge is and how Company XYZ would benefit from it. (5 marks) Critically appraise which of the above strategies would be suitable for Company XYZ (20 marks) [Total: 30 marks]
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i Exchange rate risk refers to the potential losses or gains that a company may experience due to fluctuations in exchange rates Company XYZ is exposed to exchange rate risk because it expects to rece... View the full answer
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