LorBoh GmbH is a medium-sized tea producer company, based in Berlin. December and the following transactions have been contractually agreed: 1. Sale of packaged tea, cash receipt due I February of USS19. Purchase of production equipment, invoice payable 1 May, for US$447,000 ii. Sale of packaged tea, US$154,000 cash receipt due 1 May. 0.7280-0.7320 0.7340-0.7395 R/USD exchange rates are as follows: pot Forward 1 February 0.7310 0.7355 Forward 1 May EUR/USD future prices are also available (contract size US$20,000, pricing euros per US$100) March contracts June contracts 73.25 73.85 Money market interest rates are: Euros 4% per annum 5%% per annum US dollars.

Required:

a) Demonstrate how you would hedge LorBoh's foreign exchange risk exposure on the forward markets. 

b) Demonstrate how you would hedge LorBoh's foreign exchange risk exposure on the money markets. 

c) Compare the forward market hedge to that of the money market hedge. 

d) Calculate the hedging efficiency that LorBoh could achieve on its foreign exchange risk exposure using a futures market hedge, if 0.7350-0.7390 1 February spot EUR/USD i. €74 March EUR/USD futures contracts (5 marks) 0.7295-0.7335 ii. 1 May spot EUR/USD June EUR/USD futures contracts €73

Answer rating: 100% (QA)

To hedge LorBoh GmbHs foreign exchange risk exposure on the forward markets we can use forward contracts to lock in the exchange rate for future transactions Heres how it can be done a Forward Market ... View the full answer