TDK Ltd is a US-based company manufacturing and selling Air conditioners in the US market. TDK Ltd exports its products to the United Kingdom.

TDK Ltd is due to receive £6,000,000 in 3 months from a customer for the United Kingdom.

The following information has been gathered by accounting staff related to the transactions stated above.

Following information related to the money market has been given to you.

Spot Rate: £ /$ 0.6422 3-month forward rate £ /$ 0.6731 Current interest rates: US prime 2.2% – 2.8% per annum UK LIBOR 3.4% – 3.7% per annum

 

a. Advice the management of TDK Ltd, the possible outcome of using the forward contract to mitigate the forex risk exposed in the above transaction using the information given about the money market. (support your answer with calculations) (5 marks)

 

b. Advice the management of TDK Ltd, the possible outcome of using the money market to hedge the forex risk exposed in the above transaction using the information given about the money market. (support your answer with calculations) (10 marks)

 

c. Compare possible other methods available for mitigating the above Forex risk.