Question: Question 5: Managing Foreign Exchange Exposure Ashton Ltd, a client to whom you provide nancial advice has come to you for guidance over a foreign

Question 5: Managing Foreign Exchange Exposure Ashton Ltd, a client to

Question 5: Managing Foreign Exchange Exposure Ashton Ltd, a client to whom you provide nancial advice has come to you for guidance over a foreign exchange transaction. The company, based in New Zealand has sold USD 2,000,000 of machine parts to a USA customer. The payment has been deferred for six months. The following information is relevant: Spot exchange rate = 1.724/U SD Six month forward rate = 1 .7 1 7/U SD Company's cost of capital = 12.0% p.a. US deposit rate = 6.0% p.a. US lending rate = 7.0% p.a. New Zealand - lending rate = 6.0% p.a. New Zealand - deposit rate = 5.0% p.a. Risk free rate in New Zealand = 2.0% p.a. Risk free rate in the USA = 4.0% p.a. Required: a) Calculate the expected spot rate in 6 months assuming that the interest rate parity between the two countries holds. b) Calculate the expected value of the sales proceeds in NZD using the expected spot rate computed in (a) above. c) Calculate and value of the proceeds from the sale if the company enters into a forward rate agreement. (1) Explain and calculate the net proceeds receivable by Brian's company if money market hedge is used.(Show workings) e) Based on your calculations above, which alternative would you recommend and Why

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