A company in the UK has agreed to sell goods to an importer in the US...
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A company in the UK has agreed to sell goods to an importer in the US at an invoiced price of $150,000. Of this amount, $60,000 will be payable on shipment, $45,000 one month after shipment and $45,000 three months after shipment. The quoted $/£ exchange rates at the date of shipment are as follows. Spot 1.4910 +/-0.0010 One month 1.4885 +/-0.0015 Three months 1.4820 +/-0.0020 The company decides to enter into appropriate forward exchange contracts through its bank to hedge these transactions. Required (a) (b) (c) (d) State what are the presumed advantages of doing this. Calculate the sterling amount that the company would receive. Comment with hindsight on the wisdom of hedging in this instance, assuming that the spot rates at the dates of receipt of the two instalments of $45,000 were as follows: First instalment 1.4950 +/-0.0010 Second instalment 1.5020 +/-0.0020 Describe how foreign exchange transactions using futures would differ from those assumed in part (i) of this question. A company in the UK has agreed to sell goods to an importer in the US at an invoiced price of $150,000. Of this amount, $60,000 will be payable on shipment, $45,000 one month after shipment and $45,000 three months after shipment. The quoted $/£ exchange rates at the date of shipment are as follows. Spot 1.4910 +/-0.0010 One month 1.4885 +/-0.0015 Three months 1.4820 +/-0.0020 The company decides to enter into appropriate forward exchange contracts through its bank to hedge these transactions. Required (a) (b) (c) (d) State what are the presumed advantages of doing this. Calculate the sterling amount that the company would receive. Comment with hindsight on the wisdom of hedging in this instance, assuming that the spot rates at the dates of receipt of the two instalments of $45,000 were as follows: First instalment 1.4950 +/-0.0010 Second instalment 1.5020 +/-0.0020 Describe how foreign exchange transactions using futures would differ from those assumed in part (i) of this question.
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a The presumed advantages of hedging in this instance would be to protect against any potential adve... View the full answer
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