5 Your firm is a U.K.-based Exporter of bicycles. British bicycles. AS AN EXPORTER, YOU ARE SELLING BICYCLES AND PAID SWISS FRANCS. You have sold an order to a Swiss retailer for SFr1,000,000 worth of bicycles. Payment (in Swiss francs) is due in twelve (12) months. Your firm wants to hedge the payable into pounds. (As wonderful as the U.S. dollar is, you do not want to hedge into dollars.) Country U.S. $ Equivalent Bid Ask Britain (Pound) $1.90 $1.95 1 Month Forward $1.91 $1.96 3 Months Forward $1.94 $1.99 6 Months Forward $2.00 $2.05 12 Months Forward $2.12 $2.50 Swiss Franc $0.80 $0.85 Interest (lend %-borrow %) 1 Month Forward $0.81 $0.86 SEX 3.0%-3.25% 3 Months Forward $0.84 $0.89 £ 4.0%-4.25% 6 Months Forward $0.90 $0.95 Sfr 5.0%-5.25% 12 Months Forward $1.05 $1.07 $ 6.0%-6.25% a) Detail a strategy using forward contracts that will hedge your exchange rate risk INTO BRITISH POUNDS. You must clearly state what amount of which currency you are selling or buying at what price. Give me the trading orders. (10 points) Estimate the receipt in pounds in 12 months of the strategy that you offered in part a). (10 points) c) Outline a strategy using spot exchange rates and borrowing or lending that that will hedge your exchange rate risk. Your answer does not require numbers, it requires a sentence. (10 points) d) Estimate the pound-denominated future value of the strategy that you offered in part c). Use the LIBOR interest rate convention.
5 Your firm is a U.K.-based Exporter of bicycles. British bicycles. AS AN EXPORTER, YOU ARE SELLING BICYCLES AND PAID SWISS FRANCS. You have sold an order to a Swiss retailer for SFr1,000,000 worth of bicycles. Payment (in Swiss francs) is due in twelve (12) months. Your firm wants to hedge the payable into pounds. (As wonderful as the U.S. dollar is, you do not want to hedge into dollars.) Country U.S. $ Equivalent Bid Ask Britain (Pound) $1.90 $1.95 1 Month Forward $1.91 $1.96 3 Months Forward $1.94 $1.99 6 Months Forward $2.00 $2.05 12 Months Forward $2.12 $2.50 Swiss Franc $0.80 $0.85 Interest (lend %-borrow %) 1 Month Forward $0.81 $0.86 SEX 3.0%-3.25% 3 Months Forward $0.84 $0.89 £ 4.0%-4.25% 6 Months Forward $0.90 $0.95 Sfr 5.0%-5.25% 12 Months Forward $1.05 $1.07 $ 6.0%-6.25% a) Detail a strategy using forward contracts that will hedge your exchange rate risk INTO BRITISH POUNDS. You must clearly state what amount of which currency you are selling or buying at what price. Give me the trading orders. (10 points) Estimate the receipt in pounds in 12 months of the strategy that you offered in part a). (10 points) c) Outline a strategy using spot exchange rates and borrowing or lending that that will hedge your exchange rate risk. Your answer does not require numbers, it requires a sentence. (10 points) d) Estimate the pound-denominated future value of the strategy that you offered in part c). Use the LIBOR interest rate convention.
Chapter22: International Financial Management
Section: Chapter Questions
Problem 7P
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Transcribed Image Text:5
Your firm is a U.K.-based Exporter of bicycles. British bicycles.
AS AN EXPORTER, YOU ARE SELLING BICYCLES AND PAID SWISS FRANCS.
You have sold an order to a Swiss retailer for SFr1,000,000 worth of bicycles. Payment (in Swiss
francs) is due in twelve (12) months. Your firm wants to hedge the payable into pounds. (As
wonderful as the U.S. dollar is, you do not want to hedge into dollars.)
Country
U.S. $ Equivalent
Bid
Ask
Britain (Pound)
$1.90
$1.95
1 Month Forward
$1.91
$1.96
3 Months Forward
$1.94
$1.99
6 Months Forward
$2.00
$2.05
12 Months Forward
$2.12
$2.50
Swiss Franc
$0.80
$0.85
Interest (lend %-borrow
%)
1 Month Forward
$0.81
$0.86
SEX
3.0%-3.25%
3 Months Forward
$0.84
$0.89
£
4.0%-4.25%
6 Months Forward
$0.90
$0.95
Sfr
5.0%-5.25%
12 Months Forward
$1.05
$1.07
$
6.0%-6.25%
a) Detail a strategy using forward contracts that will hedge your exchange rate risk INTO
BRITISH POUNDS. You must clearly state what amount of which currency you are
selling or buying at what price. Give me the trading orders.
(10 points)
Estimate the receipt in pounds in 12 months of the strategy that you offered in part a).
(10 points)
c) Outline a strategy using spot exchange rates and borrowing or lending that that will hedge your
exchange rate risk. Your answer does not require numbers, it requires a sentence.
(10 points)
d)
Estimate the pound-denominated future value of the strategy that you offered in part c). Use
the LIBOR interest rate convention.
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