Wenden Co is a Dutch-based company which has the following expected transactions. 

One month: Expected receipt of £2,40,000

One month: Expected payment of £1,40,000

Three months: Expected receipts of £3,00,000

The finance manager has collected the following information:

Spot rate (£ per €):                             1.7820 ± 0.0002

One month forward rate (£ per €):     1.7829 ± 0.0003

Three months forward rate (£ per €): 1.7846 ± 0.0004

Money market rates for Wenden Co:

Borrowing Deposit

One year Euro interest rate:     4.9% 4.6%

One year Sterling interest rate: 5.4% 5.1%

Assume that it is now 1 April.

 

Required: 

a. Calculate the expected Euro receipts in one month and in three months using the forward market. 

b. Calculate the expected Euro receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used. 

Answer rating: 100% (QA)

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