Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to 4...

Transcribed Image Text:

Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4 million with a large German retailer on 6 months credit. If successful, this will be the first time that Nitrogen Ltd has exported goods into the highly competitive German market. The following three alternatives are being considered for managing the transaction risk before the order is finalized. (i) Invoice the German firm in Sterling using the current exchange rate to calculate the invoice amount. (ii) Alternative of invoicing the German firm in € and using a forward foreign exchange contract to hedge the transaction risk. (iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to the nearly whole number) to hedge the transaction risk. Following data is available: Spot Rate € 1.1750 - €1.1770/£ 6 months forward premium 0.55-0.60 Euro Cents 6 months future contract is currently trading at €1.1760/£ 6 months future contract size is £62500 Spot rate and 6 months future rate €1.1785/£ Required: (a) Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three proposals. (b) In your opinion, which alternative would you consider to be the most appropriate and the reason thereof. Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4 million with a large German retailer on 6 months credit. If successful, this will be the first time that Nitrogen Ltd has exported goods into the highly competitive German market. The following three alternatives are being considered for managing the transaction risk before the order is finalized. (i) Invoice the German firm in Sterling using the current exchange rate to calculate the invoice amount. (ii) Alternative of invoicing the German firm in € and using a forward foreign exchange contract to hedge the transaction risk. (iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to the nearly whole number) to hedge the transaction risk. Following data is available: Spot Rate € 1.1750 - €1.1770/£ 6 months forward premium 0.55-0.60 Euro Cents 6 months future contract is currently trading at €1.1760/£ 6 months future contract size is £62500 Spot rate and 6 months future rate €1.1785/£ Required: (a) Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three proposals. (b) In your opinion, which alternative would you consider to be the most appropriate and the reason thereof.

Answer rating: 100% (QA)

Answer Th... View the full answer