PC& Scooter (PCS) is a US-based small business that manufacts and sells electric scooters. The company...

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PC& Scooter (PCS) is a US-based small business that manufacts and sells electric scooters. The company sells the majority of its products in the UK market through an exporting agreement with a London-based retailer named Go Scooter UK (GSUK). Under the agreement, PCS will sell 10,000 scooters each quarter to GSUK and accept payments in British pounds for the quarterly exports. Suppose PCS will be receiving a 1,000,000 British pounds payment from GSUK in 90 days. While all of its international receivables are denominated in pounds, PCS has no payables in pounds or in any other foreign currency. James, the CFO of PCS is concerned about the foreign exchange exposure associated with this foreign receivable. James holds a view that there are two possible scenarios of the exchange rate movement over the next thirty days: (1) the pound will depreciate by 3 percent over the next 90 days; or (2) the pound will appreciate by 2 percent over the next 90 days. He believes that there is a 70 percent chance that Scenario 1 will occur, and a 30 percent chance that Scenario 2 will occur. Currently, the spot exchange rate is $1.65 per pound, and the 3-month forward rate is $1.645 per pound. Annual interest rates in the US and the UK are 2.4 percent and 3.6 percent, respectively. James can purchase an over-the-counter put option that has an exercise price of $1.645 per pound, a premium of $.025 per pound, and an expiration date in 90 days. PCS' next international receipts will occur 90 days from now. You are asked to calculate the size of PCS' exposure to foreign exchange risk, and give advice on the detailed steps of: i) the forward hedge; ii) the money market hedge; iii) the options hedge. If the company decides to hedge, James would like to hedge the entire amount of the exposure. Prepare a report to present your analytical results and make recommendations to James how to best manage the exposure to foreign exchange rate risk. 5. Describe in detail a money market hedge strategy for PCS. Then, determine the amount of the receivable in the US dollar terms under each of the two exchange rate scenarios, at the end of the 90-day period. (2 mark) 6. Describe in detail a strategy for hedging with put options. Then, determine the amount of the receivable in the US dollar terms under each of the two exchange rate scenarios, at the end of the 90-day period. (2 marks) PC& Scooter (PCS) is a US-based small business that manufacts and sells electric scooters. The company sells the majority of its products in the UK market through an exporting agreement with a London-based retailer named Go Scooter UK (GSUK). Under the agreement, PCS will sell 10,000 scooters each quarter to GSUK and accept payments in British pounds for the quarterly exports. Suppose PCS will be receiving a 1,000,000 British pounds payment from GSUK in 90 days. While all of its international receivables are denominated in pounds, PCS has no payables in pounds or in any other foreign currency. James, the CFO of PCS is concerned about the foreign exchange exposure associated with this foreign receivable. James holds a view that there are two possible scenarios of the exchange rate movement over the next thirty days: (1) the pound will depreciate by 3 percent over the next 90 days; or (2) the pound will appreciate by 2 percent over the next 90 days. He believes that there is a 70 percent chance that Scenario 1 will occur, and a 30 percent chance that Scenario 2 will occur. Currently, the spot exchange rate is $1.65 per pound, and the 3-month forward rate is $1.645 per pound. Annual interest rates in the US and the UK are 2.4 percent and 3.6 percent, respectively. James can purchase an over-the-counter put option that has an exercise price of $1.645 per pound, a premium of $.025 per pound, and an expiration date in 90 days. PCS' next international receipts will occur 90 days from now. You are asked to calculate the size of PCS' exposure to foreign exchange risk, and give advice on the detailed steps of: i) the forward hedge; ii) the money market hedge; iii) the options hedge. If the company decides to hedge, James would like to hedge the entire amount of the exposure. Prepare a report to present your analytical results and make recommendations to James how to best manage the exposure to foreign exchange rate risk. 5. Describe in detail a money market hedge strategy for PCS. Then, determine the amount of the receivable in the US dollar terms under each of the two exchange rate scenarios, at the end of the 90-day period. (2 mark) 6. Describe in detail a strategy for hedging with put options. Then, determine the amount of the receivable in the US dollar terms under each of the two exchange rate scenarios, at the end of the 90-day period. (2 marks)

Answer rating: 100% (QA)

5A money market hedge strategy involves borrowing or lending funds in one currency and then converting them into another currency at the prevailing spot rate This strategy is based on the principle of ... View the full answer