Shoe Company sells to a wholesaler in Germany. The purchase price of a shipment is 50,000...
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Shoe Company sells to a wholesaler in Germany. The purchase price of a shipment is 50,000 deutsche marks with term of 90 days. Upon payment, Shoe Company will convert the DM to dollars. The present spot rate for DM per dollar is 1.71, whereas the 90-day forward rate is 1.70. You are required to calculate and explain: (i) If Shoe Company were to hedge its foreign-exchange risk, what would it do? What transactions are necessary? (ii) Is the deutsche mark at a forward premium or at a forward discount? (iii) What is the implied differential in interest rates between the two countries? (Use interest-rate parity assumption). Shoe Company sells to a wholesaler in Germany. The purchase price of a shipment is 50,000 deutsche marks with term of 90 days. Upon payment, Shoe Company will convert the DM to dollars. The present spot rate for DM per dollar is 1.71, whereas the 90-day forward rate is 1.70. You are required to calculate and explain: (i) If Shoe Company were to hedge its foreign-exchange risk, what would it do? What transactions are necessary? (ii) Is the deutsche mark at a forward premium or at a forward discount? (iii) What is the implied differential in interest rates between the two countries? (Use interest-rate parity assumption).
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i In order to hedge its foreign exchange risk the Shoe Company can opt for Forward Contract ie DM at ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
Posted Date:
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