(c) (d) Duncan Electric Ltd imports most of its component parts from the United States (US)...

 

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(c) (d) Duncan Electric Ltd imports most of its component parts from the United States (US) and is often required to make payments in US dollars (USS). The company recently placed an order to import US$300,000 of goods from the US and will make payment in US$ in one month's time. The current spot rate is US$1 = S$1.33. To hedge against this foreign currency transaction, Duncan has been advised to purchase a call option to buy US$ at an exercise price of US$1 = S$1.33. (i) (ii) Would Duncan Ltd be concerned with the strengthening (appreciation) or weakening (depreciation) of the US$? Explain your answer. (2 marks) If the spot rate in one month's time is US$1=S$1.38, should the company exercise or abandon the call option? What is the company's exchange gain or loss (in Singapore dollars)? (5 marks) One important challenge of conducting international transactions is the risk of foreign exchange movements. Foreign exchange movements will bring about transaction and translation exposure for businesses. Describe what is transaction and translation exposure and their impact on businesses. (4 marks) (c) (d) Duncan Electric Ltd imports most of its component parts from the United States (US) and is often required to make payments in US dollars (USS). The company recently placed an order to import US$300,000 of goods from the US and will make payment in US$ in one month's time. The current spot rate is US$1 = S$1.33. To hedge against this foreign currency transaction, Duncan has been advised to purchase a call option to buy US$ at an exercise price of US$1 = S$1.33. (i) (ii) Would Duncan Ltd be concerned with the strengthening (appreciation) or weakening (depreciation) of the US$? Explain your answer. (2 marks) If the spot rate in one month's time is US$1=S$1.38, should the company exercise or abandon the call option? What is the company's exchange gain or loss (in Singapore dollars)? (5 marks) One important challenge of conducting international transactions is the risk of foreign exchange movements. Foreign exchange movements will bring about transaction and translation exposure for businesses. Describe what is transaction and translation exposure and their impact on businesses. (4 marks)

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c i Duncan Electric Ltd would be concerned with the strengthening appreciation of the US because it would mean that they would have to pay more in Sin... View the full answer