DFI 523 CLASS EXERCISE 2 A merchant in the UK has agreed to buy goods from an exporter in the USA at an invoiced price of $150,000. Of this amount, $60,000 will be payable on shipment, $45,000 one month after shipment and $45,000 three months after shipment. The quoted foreign exchange rates ($per ) at the date of shipment are as follows. Spot One month Three months 1.690 -1.692 1.687-1.690 1.680 1.684 The merchant decides to enter into appropriate forward exchange contracts through his bank to hedge these transactions. Required i. Discuss the presumed advantages of doing this. (5 marks) ii. Calculate the total sterling amount that the merchant would pay. (7 marks) iii. Comment with hindsight on the wisdom of hedging in this instance, assuming that the spot rates at the dates of payment of the two instalments of $45,000 were as follows. First instalment Second instalment 1.694-1.696 1.700 -1.704 (8 marks)